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You can not deny that Netflix is an excellent video service. I gladly admit that it is also a great deal
But as I said recently to my RiskHedge subscribers, it's a lousy stock.
The problems start with the evaluation. Even after the recent bloodbath, Netflix is dangerously too expensive. It has a price / earnings ratio (P / E) of 160 compared to the S & P 500 of 24.
Why did investors bet on this absurd price? The argument goes something like this …
Netflix has earned 90 million subscribers over the last four years and will continue to add millions every quarter for years to come. Revenues will skyrocket, which will turn the company into a cash-generating machine, and its stock "will become an added value".
Using simple calculations, I will show you why anyone who buys this title lives in Fantasyland.
Reason # 1: Netflix Maximized Its Audience in the United States
Netflix today has 130 million subscribers. Of these, 57 million are in the United States and another 73 million scattered around the world.
Now, there are 126 million households in America. This means that nearly 45% of US households already have a Netflix subscription.
Deloitte's accounting firm, Big Four, revealed that 55%, or 70 million US households, subscribed to a streaming service. Thus, even if each streaming home subscribed to Netflix, there are only 13 million "potential" customers left.
This is a pretty low ceiling compared to Netflix.
Reason # 2: Netflix is already fighting to acquire new subscribers
In the first six months of this year, the company spent $ 456 million on marketing in the United States. That's double what he spent last year.
It has acquired 2.66 million new subscribers, which represents a cost of just over $ 170 per new user.
This is a huge jump of 160% compared to the cost of $ 65 per new user that he enjoyed just two years ago.
The standard Netflix package costs $ 10.99 / month. With an acquisition cost of $ 170, it takes nearly 16 months to break even for a new user. And keep in mind that its acquisition costs are rising rapidly.
Reason # 3: Netflix must experience incredibly fast global growth
Over the past year, Netflix has added four times more international subscribers than Americans. The company expects that about 75% of growth will come from international markets.
It is therefore by far the most important segment to watch for.
The growth rate of Netflix subscribers has increased by about 17% per year. To continue to grow so rapidly, it will add more than 30 million new users next year: 35 million in 2020 … and 40 million in 2021.
My research shows that it will probably be difficult to add even three million new subscribers / year to the saturated market of the United States. This means that almost all of this growth must come from international markets.
And here, Netflix is facing another roadblock …
Reason # 4: Netflix fights with original content for international markets
Netflix has achieved incredible growth by blowing up the TV distribution model. He ate the lunch of the cable companies, who were the guardians of what people are watching.
But as I already explained, the distribution is not so important anymore. Thanks to the Internet, we can watch almost anything we want, at any time.
Excellent content is what really matters today.
Netflix has proven that it can create good content for an American audience. But to succeed internationally, it must do in countries as diverse as France, India, Mexico and Brazil.
For most, television is a "local" thing. Americans like to watch American shows. Brazilians like to watch Brazilian shows. This means that Netflix has to make "local hits" to attract the masses to these countries.
Until now, this has failed.
I do not even know if it's even possible for a company to become a content expert in a dozen different countries, with a dozen different languages and cultures.
But even if it's possible, Netflix does not have the money to do it.
Reason # 5: Netflix debt explodes
Netflix has spent a whopping $ 5.36 billion in content over the last six months.
Its content expenditures have increased at an annual rate of 50% over the last five years. It's significantly faster than the rate at which its sales have increased.
This new content has helped attract 20 million international subscribers over the last year. But it was very expensive.
The $ 5.4 billion it has spent on content creation in the last six months is less than the $ 1.3 billion it will make this year.
Netflix has borrowed to make up the difference. Its debt has exploded from $ 2.37 billion in 2016 to $ 8.34 billion today.
Do not be short with Netflix
Many people will read this and conclude that Netflix is a good short film.
Do not do it. Do not short Netflix.
As you can see from its P / E ratio of 165, Netflix shares are not fundamentally influenced. This is the enthusiasm of investors, totally unpredictable.
There are much easier and smarter ways to make money in the markets than to sell short a title fueled by the lofty dreams of investors, such as …
I recommend you to buy Walt Disney Company (DIS) instead
Last August, Disney announced the launch of its own streaming service. I am convinced that Disney will crush Netflix and become the first streaming service in a few years.
Since I recommended Disney for the last time, it has become even stronger. On July 19, he signed an agreement to purchase 21st Century Fox (FOXA). Disney, which already has the best content in the world, now has even more favorite shows from the United States.
With this offer, Disney acquires:
- The Fox movie studio, which made Oscar winners as Avatar, Titanic, and Slumdog Millionaire.
- The X-Men franchise, Modern family, National Geographic Channel, and The simpsons.
- And perhaps more importantly, a 60% controlling stake in the second streaming service in America, Hulu.
Do not forget that Disney already has known names such as Marvel … Pixar Animations … Star Wars … ESPN … ABC. He has produced the world's best-selling film in six of the last seven years.
When "Disneyflix" it will be a simple purchase for most families. And remember, Disney will remove all this popular content from Netflix.
Disney is a great buy at today's price. I'm expecting it to be a long-term outfit for me.
If you are looking for more actions like Disney, check out my latest special report in which I discover three "Buy Now" that are coiled to disrupt entire industries (details below).
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You can not deny that Netflix is an excellent video service. I gladly admit that it is also a great deal
But as I said recently to my RiskHedge subscribers, it's a lousy stock.
The problems start with the evaluation. Even after the recent bloodbath, Netflix is dangerously too expensive. It has a price / earnings ratio (P / E) of 160 compared to the S & P 500 of 24.
Why did investors bet on this absurd price? The argument goes something like this …
Netflix has earned 90 million subscribers over the last four years and will continue to add millions every quarter for years to come. Revenues will skyrocket, which will turn the company into a cash-generating machine, and its stock "will become an added value".
Using simple calculations, I will show you why anyone who buys this title lives in Fantasyland.
Reason # 1: Netflix Maximized Its Audience in the United States
Netflix today has 130 million subscribers. Of these, 57 million are in the United States and another 73 million scattered around the world.
Now, there are 126 million households in America. This means that nearly 45% of US households already have a Netflix subscription.
Deloitte's accounting firm, Big Four, revealed that 55%, or 70 million US households, subscribed to a streaming service. Thus, even if each streaming home subscribed to Netflix, there are only 13 million "potential" customers left.
This is a pretty low ceiling compared to Netflix.
Reason # 2: Netflix is already fighting to acquire new subscribers
In the first six months of this year, the company spent $ 456 million on marketing in the United States. That's double what he spent last year.
It has acquired 2.66 million new subscribers, which represents a cost of just over $ 170 per new user.
This is a huge jump of 160% compared to the cost of $ 65 per new user that he enjoyed just two years ago.
The standard Netflix package costs $ 10.99 / month. With an acquisition cost of $ 170, it takes nearly 16 months to break even for a new user. And keep in mind that its acquisition costs are rising rapidly.
Reason # 3: Netflix must experience incredibly fast global growth
Over the past year, Netflix has added four times more international subscribers than Americans. The company expects that about 75% of growth will come from international markets.
It is therefore by far the most important segment to watch for.
The growth rate of Netflix subscribers has increased by about 17% per year. To continue to grow so rapidly, it will add more than 30 million new users next year: 35 million in 2020 … and 40 million in 2021.
My research shows that it will probably be difficult to add even three million new subscribers / year to the saturated market of the United States. This means that almost all of this growth must come from international markets.
And here, Netflix is facing another roadblock …
Reason # 4: Netflix fights with original content for international markets
Netflix has achieved incredible growth by blowing up the TV distribution model. He ate the lunch of the cable companies, who were the guardians of what people are watching.
But as I already explained, the distribution is not so important anymore. Thanks to the Internet, we can watch almost anything we want, at any time.
Excellent content is what really matters today.
Netflix has proven that it can create good content for an American audience. But to succeed internationally, it must do in countries as diverse as France, India, Mexico and Brazil.
For most, television is a "local" thing. Americans like to watch American shows. Brazilians like to watch Brazilian shows. This means that Netflix has to make "local hits" to attract the masses to these countries.
Until now, this has failed.
I do not even know if it's even possible for a company to become a content expert in a dozen different countries, with a dozen different languages and cultures.
But even if it's possible, Netflix does not have the money to do it.
Reason # 5: Netflix debt explodes
Netflix has spent a whopping $ 5.36 billion in content over the last six months.
Its content expenditures have increased at an annual rate of 50% over the last five years. It's significantly faster than the rate at which its sales have increased.
This new content has helped attract 20 million international subscribers over the last year. But it was very expensive.
The $ 5.4 billion it has spent on content creation in the last six months is less than the $ 1.3 billion it will make this year.
Netflix has borrowed to make up the difference. Its debt has exploded from $ 2.37 billion in 2016 to $ 8.34 billion today.
Do not be short with Netflix
Many people will read this and conclude that Netflix is a good short film.
Do not do it. Do not short Netflix.
As you can see from its P / E ratio of 165, Netflix shares are not fundamentally influenced. This is the enthusiasm of investors, totally unpredictable.
There are much easier and smarter ways to make money in the markets than to sell short a title fueled by the lofty dreams of investors, such as …
I recommend you to buy Walt Disney Company (DIS) instead
Last August, Disney announced the launch of its own streaming service. I am convinced that Disney will crush Netflix and become the first streaming service in a few years.
Since I recommended Disney for the last time, it has become even stronger. On July 19, he signed an agreement to purchase 21st Century Fox (FOXA). Disney, which already has the best content in the world, now has even more favorite shows from the United States.
With this offer, Disney acquires:
- The Fox movie studio, which made Oscar winners as Avatar, Titanic, and Slumdog Millionaire.
- The X-Men franchise, Modern family, National Geographic Channel, and The simpsons.
- And perhaps more importantly, a 60% controlling stake in the second streaming service in America, Hulu.
Do not forget that Disney already has known names such as Marvel … Pixar Animations … Star Wars … ESPN … ABC. He has produced the world's best-selling film in six of the last seven years.
When "Disneyflix" it will be a simple purchase for most families. And remember, Disney will remove all this popular content from Netflix.
Disney is a great buy at today's price. I'm expecting it to be a long-term outfit for me.
If you are looking for more actions like Disney, check out my latest special report in which I discover three "Buy Now" that are coiled to disrupt entire industries (details below).
