InvestingDaily.com

Account Information

  • My Account

    Manage all your subscriptions, update your address, email preferences and change your password.

  • Help Center

    Get answers to common service questions, ask the analyst or contact our customer service department.

  • My Stock Talk Profile

    Update your stock talk name and/or picture.



Close
FEATURED STRATEGY

How To Collect Your Share of My Million Dollar Giveaway

How To Collect Your Share of My Million Dollar GiveawayWe recently kicked off the most outrageous initiative in the history of investment research. It’s called the Income Millionaire Project. And the goal is simple: create 1,000 income millionaires. That’s a $1 billion goal! No one has ever tried it before, but that doesn’t bother me. I’m so sure you can use this program to make a million bucks… I’ll pay you $1,000 to start your journey. Go here for details.

 

The Rise and Fall of Netflix

By Jim Pearce on April 22, 2016

Shares of video streaming company Netflix (NFLX) plunged 15% this week after the company announced surprisingly weak first quarter results on Monday. It was trading above $130 four months ago, but since then NFLX has seen its share price fall back to where it was last July when it broke above $95 for the first time.

At the heart of the matter isn’t so much Netflix’s financial results, but its anemic growth in subscribers. The company now projects only 2.5 million net (of cancellations) new customers in the second quarter of this year, about 40% less than the 4 million increase analysts had built into their growth estimates at the beginning of 2016.

Just as surprising is the Netflix analysts were caught off-guard by this development. Based on the amount of insider information that gets passed around on Wall Street, especially about companies as popular as Netflix, you would think that a miss of that magnitude would begin seeping out weeks before the announcement.

In this case the company’s officers and directors had good reason to keep this secret under wraps. As Netflix’s share price zoomed up the charts the past couple of years, proponents of the stock have argued that earnings were secondary to capturing market share. But if the market share argument no longer holds water, then what is Netflix really worth?

We shall soon find out. Momentum stocks like Netflix exist in a parallel universe, where the conventional rules of investing do not apply. That’s why certain companies, such as Tesla, can garner a cult like-following that pays little regard to how much money the company actually makes. All that seems to matter is that they have a cool product that everybody seems to want, regardless of price.

At least, that’s what Netflix thought when it announced at the beginning of this year that it was raising its monthly subscription price by $2 to $9.99 starting in May for its legacy members, most of whom believed they had been promised by Netflix that their rate would never go up when they first enrolled. The challenge for Netflix is its costs are going up, so leaving this large pool of users at a fixed price indefinitely was becomingly increasingly less profitable.

That problem is further compounded by the fact that those same users now have many more choices for streaming video than they did five years ago, much of which is free or provided by cable companies as part of a bundle. Many of its legacy users had become loyal to Netflix before those cheaper options emerged, to the point that they were not inclined to seek out lower cost alternatives. However, all it took was one broken promise to bring Netflix’s real-life house of cards tumbling down.

The lesson of Netflix, and many other failed momentum stocks before it, is that ultimately financial results do matter, no matter how captivating the product may be. Burning through large amounts of other people’s money to gain market share only works if those customers can be converted to a profitable revenue stream before shareholders become impatient. That’s the same tightrope Tesla is now walking, hoping to safely reach the platform of profitability at the other end of the line before it gets knocked for a loop and takes the same plunge as Netflix.

What amazes me is how often this happens, and yet some people never learn. They allow themselves to buy into the “this time it really is different” argument, even though that same reasoning has failed countless investors before them. Even worse, it is painfully easy to spot an overpriced momentum stock since that data can be easily extracted from a wide variety of sources on the Internet.

That’s why I shake my head whenever an overvalued company such as Netflix eventually blows up and its shareholders claim to be blindsided by what must have seemed an unimaginable event. If you want to know why Netflix stock got hammered this week, the explanation is simple: it is only marginally profitable and pays no dividend, yet was trading at more than 100 times forward earnings.

At the risk of saying I told you so… I told you so. Or at least, my IDEAL stock rating system told all of us that NFLX was overvalued and at risk of a steep fall. It was recently featured in a PF Special Report as one of “10 Overvalued Stocks to Avoid RIGHT NOW!” By the way, Netflix is one of 26 stocks in the S&P 500 that earns the lowest possible score that my formula can assign. If you’d like to know who the other 25 are before its too late, click here.


You might also enjoy…

 

Obscure Tax Law Forces This Company to Pay Out 90% of its Profits

A 50-year-old loophole is forcing one company to pay out $9 of every $10 it makes from ironclad contracts with the U.S. Government.

In fact, over the past seven years, it’s made payments ranging from a few dollars… to tens of thousands of dollars… 30 times. Without a single cut! 

Most folks don’t even know this company exists, but the ones that do are making a mint.

Like Ted B., who’s set to receive a check for $1,096 just a few days from now.

Merrill H., a 58-year-old from New York, has collected over $3,385 so far. 

And retirees Beth and Terry P. have raked in $16,555.

I’ve put together a special report that will give you all the details, including simple instructions on how to get your name on the payout list before the next cutoff date.

You can get your copy here.

Stock Talk — Post a comment Comment Guidelines

Our Stock Talk section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a general investment comment not related to this article, please post to our Stock Talk page. If you have a personal question about your subscription or need technical help, please contact our customer service team. And if you have any success stories to share with our analysts, they’re always happy to hear them. Note that we may use your kind words in our promotional materials. Thank you.

You must be logged in to post to Stock Talk OR create an account.

Create a new Investing Daily account

  • - OR -

* Investing Daily will use any information you provide in a manner consistent with our Privacy Policy. Your email address is used for account verification and will remain private.