NETFLIX: The End Of The GROWTH Story?

26 Jul 2021

While many of you might be surprised to see anyone being bearish biased on NETFLIX of all things, I say that my bias has some solid basis underneath it

Firstly, let's deal with the elephant in the room: the whole market is a massive bubble with SPY gaining more than 100% from the Lows of the COVID crash, and NETFLIX gained 104%

One might say that gaining 104% in less than a year is a spectacular achievement, however, considering the fact that the company grew its business massively since the beginning of the lockdowns, outperforming the market by a mere 4% is a sign that the investors are beginning to get skeptical about the future growth, and that is the KEY

You see, all the tech stocks are a growth story, not the value story, and by the virtue of being a growth stock NTFLX is wildly overpriced with the P/E standing at 64, while the SPY benchmark P/E stands at 34 which means that NETFLIX is trading at a 100% premium to the market and that given that SPY is now full of tech growth stocks itself which skews the P/E to the upside, while also benefiting from the passive ETF flows which have determined the rapid market growth after 2008 that outpaced the GDP growth by a factor of 5

All of the above means that the moment Netflix stops being considered a growth story it will start falling to at least cover the gap with the SPY P/E and if it gets kicked out of the index it will lose all the passive inflows and the price will halve again.

So am I convinced that the Netflix growth is over? Let's take a look at the data:

Here is an extract from the LA Times article on the company:
«The streaming giant added a mere 1.5 million paying members globally in the second quarter, which is down 85% from the same period last year when it reported 10.1 million subscriber additions. The company also added 61% fewer subscribers than it did in the first quarter when it missed projections with 3.98 million new accounts. In the U.S. and Canada, Netflix lost about 430,000 paid memberships in the second quarter»

It means that the company gained almost all of the potential subscribers during the lockdowns, that it would have been gaining for years otherwise, as those who could/wanted to subscribe did so, and the pool of those that haven’t yet is relatively small.

Also, NETFLIX is finally losing its monopoly, which once brought fat margins, as the Disney+, HBO Max, and other players are gaining market share breathing down the company’s neck, which not only adds downward pressure to the subscription price but also increases the cost of the content, as the competition for quality scripts and actors drives the prices higher

That puts Netflix- once a king reigning supreme between the rock and the hard place, fighting for the market that is not growing as fast anymore while having to Lower the subscription prices and paying more for the content simultaneously.

And Unlike Google, Amazon, or Apple that have secured near-monopoly positions, tying their customers to the ecosystems and capitalizing on the Network effect, while having aces up their sleeves like championing General purpose AI or being on the cutting edge of quantum computing, Netflix has nothing to offer outside of their small niche and what is more important, the company’s product is easily replaceable and is not essential or even unique anymore.

Summing up, while I am not saying that the stock will collapse tomorrow when the crash comes, all everything falls, NETFLIX might be the one that never recovers.
SHORT TRADE SUGGESTION: buy PUT options that are 6 months and 1 year from now at the strikes that are at -50% of the current price and keep rolling the position with time.
You might get 20:1 or even 50:1 returns if you catch the crash!


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