The FAANG stocks have been a perplexing bunch so far in 2019, posting strong gains from January to April before tumbling in May. For Netflix (Netflix Stock Quote, Chart NASDAQ:NFLX), those early increases were followed by a lot of sideways movement, as the market mulls over the company’s prospects in an age of increasing competition in the streaming content space.
And while Netflix continues to post strong quarter subscriber numbers, the emergence of competitors such as Disney, Apple and Hulu is bound to have its impact on the company, says Stan Wong, wealth management director at Scotia Wealth, who says the stock is perennially overvalued.
Netflix Stock is Pricey
“Netflix is not a stock that I’ve ever owned other than very short trading periods,” said Wong, in conversation with BNN Bloomberg Wednesday. “I just think that there’s a lot of competition and when you look at the valuation, it’s never really been cheap. Right now, it’s trading at around 87x-90x forward earnings.”
“It has a great growth rate, expected at 40 per cent, but Disney is coming into the fold later on this year and you’ve got Hulu out there and HBO -all of these streaming networks that will be competition for Netflix,” he says.
“Yes, they have 150 million subscribers but they’re burning cash very quickly. This year, they’re expected to burn about $15 billion in cash for content, which is kind of a vicious circle: they have to get that content in but they have to spend that money. And they’re going to lose a lot of that content when Disney joins the fray,” he added.
Netflix last posted its earnings in mid-April where its first quarter beat analysts’ estimates for both revenue and earnings. The company’s top line was $4.52 billion compared to the expected $4.50 billion, while its EPS of $0.76 per share bested the Street’s $0.57 per share. (All figures in US dollars.)
And while its subscription additions both domestically and internationally grew by a touch more than was forecast, guidance from management was disappointing, calling for second quarter EPS of $0.55 per share where analysts were expecting $0.99 per share.
The company remains profitable, coming in with an operating margin of 10.2 per cent in Q1, but its debt level has continued to rise as the company pours more money into original content. Last month, Netflix announced that it would raise another $2.0 billion in debt, aimed at staying ahead of the competition.
Uncertainty about Netflix’s future
That uncertainty about Netflix’s future in the streaming wars is cause for concern, says Wong.
“The level of competition makes me a little bit nervous in terms of owning this particular FAANG stock,” he said. “If you look at the stock for the past year, it’s pretty sideways and you’re seeing that 200-day moving average start to slowly slide downwards.”
“If you’re looking at the FAANG stocks, it’s the one of the few that I wouldn’t own at this point,” he says.