2 Reasons To Avoid Netflix
With new cases of the coronavirus spiking in the US and worldwide .
With the already historic unemployment levels and job losses in recent months .
And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital over time.
And this is huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
Both things are necessary to build wealth. But most only think of investing well.
Today I want to talk about the second part of things that few consider… Staying away from investments where you’ve got a high probability of losing money in.
2 Reasons To Avoid Netflix
- It’s Enormously Overvalued
Normally in these articles I talk about other things like debt levels and the negative affects the coronavirus is having on a company’s financials, and other things.
But frankly those don’t matter much right now with Netflix being so overvalued and competition increasing enormously.
As of this writing Netflix is a $215.9 billion market cap video and TV show streaming company that is massively overvalued.
From January 1st, 2020 to today its stock is up 49.1% this year…. From $329.81 on January 2nd, 2020 to $491.63 per share as of this writing.
This leads to the following massive valuations…
Its P/E is 81.2.
Its P/CF can’t be measured due to its negative free cash flow… I’ll talk about this more in reason #2 to avoid Netflix.
And its forward P/E is 76.3.
On all these metrics I look to buy investments below 20 to consider them for investment.
Netflix’s valuations are far above these levels.
Its market valuation is so high that Netflix is as of this writing the 22nd largest company in the world when sorted by market cap.
Its market cap is now larger than the following companies…
- Bank of America
- Coca Cola
- And many others.
In one sense this enormous valuation makes sense…
Netflix is the leader in streaming content worldwide for videos, movies, TV shows, and documentaries.
But competition is increasing rapidly which is causing its costs to rise dramatically… This is reason #2 to avoid Netflix.
- Increased Competition Leads To Higher Costs
In 2007 Netflix owned an estimated 91% of the “video streaming market.”
Today it owns an estimated 19% of that same market it helped pioneer.
Netflix has an estimated 182.8 million subscribers as of April 2020.
Amazon Prime Video has an estimated 150 million as of January 2020.
Hulu has an estimated 30 million subscribers as of March 2020.
Disney+ has an estimated 54.5 million as of March 28th 2020… This only 4 months after launching in November 2019.
And these are just a few of its largest competitors…
CBS, ABC, ESPN, NBC, Apple, and many other media giants are also getting into the streaming arena.
This is leading to higher costs for Netflix.
Because many of these other companies – namely Disney – already have years or decades worth of original and exclusive content they can put on their individual platforms.
This content is exclusive to those platforms. Which means it’s taken off places like Netflix.
As one example, Disney has Marvel properties, Star Wars, Mickey Mouse, Toy Story, and access to its huge decades long back log of other iconic characters and properties.
Until recently, Netflix had zero original content. So, they had to pay huge sums to develop and create things from scratch.
And now that more and more streaming providers are coming out… This is increasing Netflix’s spending enormously in recent years.
The chart from left to right begins in 2010 and ends with the trailing twelve months (TTM) number at the right.
EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.
This is why I can’t tell you what its P/CF valuation is because its free cash flow is negative.
And this spending leading to negative free cash flow is accelerating…
One example of this is that Netflix plans to spend $17.3 billion on content acquisition and creation in 2020.
By 2026 analysts expect Netflix to spend up to $26 billion on content acquisition and creation.
This is tens of billions of dollars Disney won’t have to spend to buy or create content from scratch.
Yes, developing shows and movies based on characters and stories will still be expensive for Disney… But nowhere near as expensive as creating things from scratch.
Plus, that amount doesn’t include the marketing of this new content as well…
It takes a while for someone to understand a new show or movie property any time I comes out… And this requires large amounts of marketing dollars.
It’s far easier to know what Mickey Mouse is and what that property is going to do to entertain you or your kid when launching a new property for that character for example.
Once Disney launched its Disney+ streaming service in November all its past content got removed from Netflix and put on its own platform.
This hurts Netflix.
And it’s also a large reason Disney+ has so many subscribers already after only a few months.
The winner of the Streaming Wars will be important because they’ll reap the largest rewards. But I don’t think any of these larger streaming companies are going anywhere.
We’re watching more streamed movies and TV shows now than ever before due to the coronavirus. This will help Netflix and all its competitors in the short term.
And the more technology and streaming continues getting faster and better the more we’ll be watching at home even after this pandemic ends.
Whether they’re Netflix, Disney+, Amazon Prime, or anything else.
I think all these companies will survive and thrive in the years to come.
And I don’t even think Netflix stock will crash and burn either.
But I still don’t recommend you buy Netflix due to its massive valuation.
Because it’s so overvalued this means you should expect to earn a lower return owning its shares going forward even while it continues to grow.
The high valuation combined with the increased costs leading to negative free cash flow make Netflix a risky investment that I recommend you avoid.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.