By Stephen McBride via Iris.xyz.
As you may have heard, Netflix (NFLX) bombed on earnings results this week.
The company fell short of its growth target by more than two million subscriptions. And for the first time in eight years, it reported a subscriber loss in the US.
The stock plunged more than 10% on the news.
Last July I wrote explaining why Netflix was in big trouble. If you sold Netflix after reading that essay, nice call—you sold on the highs and avoided the bloodbath.
If you still own Netflix or you’re tempted to “buy the dip,” please don’t.
Netflix Investors Live in Fantasyland
It has exploded 5,600% in the past 10 years, outperforming even mighty Amazon (AMZN) by more than 2X.
Everyone, including me, thinks Netflix’s video service is great. I’ll happily admit that Netflix is a great business.
But it’s a lousy stock.
The problems start with valuation. Even after plummeting more than 10%, Netflix is dangerously overpriced. It has a price/earnings (P/E) ratio of 140, compared to the S&P 500’s of 22.
Why have investors bid it up to this absurd price? The argument goes something like this…
Netflix has gained 100+ million subscribers in the past five years and will continue adding millions every quarter for years to come. Revenue will skyrocket, which will turn the company into a cash-generating machine, and its stock will “grow into its valuation.”
Using simple math, I’m going to show you why anyone who believes this is living in fantasyland.
Read the full article at Iris.xyz.
