Netflix Stock: Why It’s Overvalued

Netflix Stock

Netflix Stock (NASDAQ:NFLX)

Netflix (NASDAQ:NFLX) has nearly doubled from its 52-week lows, and the company’s market capitalization is now back above $140 billion. But, as we’ll see in this article, the company is still risky because its business needs to grow, which means Netflix stock is not a good investment anymore.

Netflix Is a Follower of Trends, Not a Leader

As the market got more expensive, Netflix had to start following the trends. After avoiding ads for a long time, the company recently announced an ad-supported tier. They needed a way to make more money and decrease the prices customers pay directly. It needs to be clarified what will happen.

At the same time, the company has had to scale back some of its goals, like its video game division, and increase the number of movies it puts in theaters after realizing how well the traditional media model works. When the company was the only streaming service, these advantages were easy to avoid, but they are becoming harder to avoid as competition grows.

Netflix Has Nothing Else to Offer

The main problem with Netflix is that it has nothing else. They are just streaming services. A traditional media company like Disney can get different kinds of income from theme parks, theater releases, streaming, and cable (NYSE:DIS). That means all of Netflix’s money must come from a single business.

Netflix adds new shows but doesn’t make any more money because of it. Even if Disney doesn’t make money from a show on a streaming service, it does from selling toys, getting people to visit its parks, and taking cruises. It strengthens the business and lets the company make much less money in its streaming business. That makes things hard for Netflix.

The company is finally trying out ads, but will it be too little, too late? Netflix’s financial guidance indicates continued stagnation.

The company made just under $7.93 billion in sales during its most recent quarter, a slight drop from last year’s. The company’s income has been stable through the first three quarters of 2022. The company expects its revenue to go down by $150 million in the fourth quarter of 2022, leading to a 0.9% increase in revenue year over year.

In the fourth quarter of 2022, the company’s operating margin is likely to be much lower than in the third quarter. This is because the company moved expenses to the fourth quarter in the third quarter, which led to higher margins in the third quarter. The company says that the diluted EPS for the quarter should be $0.36.

How Netflix Sets Prices

Netflix’s risk is that it will need to be able to charge more for its services.

People who use Netflix now think the company is losing money because it keeps raising prices and making people angry. The company said it was because people shared passwords, and there was more competition. Even with all of this, the most important thing to know is that the company has lost much of its pricing power. It can’t keep raising prices at such a fast rate any longer.

HBO recently raised prices by $1 per month, which suggests that other competitors may do the same. Until then, we don’t think Netflix will be able to improve its margins by much.

Our Opinion

Netflix was a leader in a new industry before it took over it. The company is the biggest streaming service in the world and makes tens of billions of dollars annually. The company has also grown to become one of the biggest content producers in the world, with an annual budget of nearly $20 billion for content.

The company has been hurt by its own success, which is sad. Other big media companies have seen the potential in streaming and have made much progress in this area. Netflix is right that its competitors are losing money, but that doesn’t mean they won’t make billions of dollars from other businesses.

In the meantime, Netflix’s ability to set prices has decreased, and we think the company will need to do better financially. It will be hard for the company to make enough money to justify its price, leading to average returns for shareholders in the future. Tell us in the comments what you think.

We suggest a pair trade to people who want to invest. Shorting Investors can buy shares in both Warner Bros. Discovery (NYSE:WBD) and Disney through Netflix. This will let investors make money from a market or entertainment industry recovery while also making money from the fact that we think Netflix will keep getting worse.

The biggest problem with our idea is that many people worldwide need access to the internet or a streaming service. Because of this, there is still a big market that hasn’t been touched, and Netflix is the leader in the streaming market. This means that Netflix can improve its market position as the market grows.

Bottom Line

Netflix seems to have reached the top of its game. The company thinks year-over-year growth will be in the low single digits in the next quarter. The company feels that sales will drop again in the next quarter. The company has reached its highest level of annualized revenue. At the same time, the company’s margins won’t be as good as they have been lately.

The number of shares in the company that are still outstanding has stayed about the same or even gone down a little, but the company’s FCF is almost zero. The company doesn’t have the plan to fix it or boost growth, but its current market capitalization needs $15 billion in stable long-term FCF or 50% of its revenue.

Because of this, we still think Netflix stock is way too expensive.

Featured Image: Unsplash @ Clay Banks

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About the author: Stephanie Bedard-Chateauneuf has over four years of experience writing financial content for various websites. Over the years, Stephanie has covered various industries, with a primary focus on consumer stocks, cannabis stocks, tech stocks, and personal finance. This stock lover likes to invest for the long-term. Stephanie has an MBA in finance.