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Netflix Breaks Down, Is It Time to Sell?

Stock (Symbol)

Netflix (NFLX)

Stock Price

$157

Sector
Technology
Data is as of
May 7, 2017
Expected to Report
Jul 17
Company Description
Netflix, Inc. is a provider of Internet television network. The Company has over 57 million streaming members in over 50 countries. Its members can watch more than two billion hours of television (TV) shows and movies per month, including original series, documentaries and feature films on Internet-connected screen. The Company has three operating segments: Domestic streaming, International streaming and Domestic DVD. Source: Thomson Financial
Sharek’s Take
David SharekNetflix (NFLX) has broken down, is this time to sell? How low can NFLX go? First let’s see what NFLX is WORTH. Netflix has just-under 100 million subscribers now, up from 80 million in the end of 2015. It could have 120 million subscribers by the end of this year. Perhaps 200 million subs in five years. Right now it’s spending to grow overseas, so the company is losing money Internationally (which is fine) so I manually calculate what NFLX could be making. The company makes $119 a year for Domestic Streaming (up from $102 last year due to a price increase), $93 for Intl Streaming and $125 for its Domestic DVD by mail membership. Intl subscription prices and margins will someday rise to that of the U.S, and in the example below use a hypothetical $120 per year subscription price on 120 million subs.

$14.4 billion, Annual Revenue
-8.6 billion, Cost of Revenue (60%)
-3.0 billion, Marketing (7%), Technology (9%), Admin (5%)
$2.8 billion Gross Profit or $2 billion after taxes
$2 billion/431 million shares outstanding = $4.64 in profits (EPS)

NFLX is a dominant worldwide brand that’s expanding rapidly. Sales grew 35% last qtr, I feel it’s deserving of a 35 P/E. Thirty-five times $4.64 is $162 — and that’s my Fair Value

One Year Chart
I want to focus on technical analysis here, as the fundamentals are solid and we are trying to “find a bottom” which could be a support level or a moving average. Although the stock has almost doubled in a year, there’s a lot of support around $140-145. The stock should hold there. Next support is $100. Institutions use moving averages as buy or sell signals, with the 50-day being the first place to buy/sell, followed by the 200-day as major support. NFLX just broke below its 50-day moving average at $154 and the 200-day is $131. If NFLX breaks through the 200-day, it would be a bad sign and a sell signal. But with strong fundamentals I would assume funds would buy there, and start a rally.
Fair Value
Using the napkin analysis above, my long-term view is 200 million subscribers or $7.77 in profits per year in say five years. A 35 P/E x $7.77 in profits would equate to a $272 stock price. 
Bottom Line
Netflix is a great stock, but can be volatile as qtrly subscriber additions often skew people’s views on the long-term prospects for this company. In the end this is one of the world’s top franchises, has a business that’s easily expandable digitally, and has the ability to raise prices when it wants. But the stock is high now and could be in for a correction. Should we sell? Hell no. I think the stock will get support at $140 and if it falls below that the funds will step in and buy at $130. NFLX ranks 20th of 30 stocks in the Growth Portfolio Power Rankings. I would like to add it to the Aggressive Growth Portfolio.
Power Rankings
Growth Stock Portfolio

20 of 30

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

N/A

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