Why This is Not the Right Time to Buy Netflix (NFLX) Stock

Wall Street firm positive on Netflix's business, but cautious on the stock and acquisition prospects.

Netflix NFLX stock

Shares of Netflix, Inc. (NASDAQ:NFLX) dipped as low as 1.50% to $102.76 in mid-day trading on Monday, as the stock continues to see losses after Deutsche Bank AG (NYSE:DB) initiated coverage of the shares with a ‘Sell’ rating and a $90 price target – or a fall of about 14% from where Netflix is currently trading/$104 – warning that the market’s expectations for the name are too high through FY 2020.

The bank noted that given the fact the streaming giant has penetrated more than 50% of U.S. broadband homes, it will be more difficult for the service to obtain new subscribers going forward. Thus, DB expects Netflix’s subs growth decelerating going forward.

Deutsche also said that while it’s still positive on the company’s business, it sees the risk versus reward in the Netflix stock as “unattractive” in the face of competition from e-commerce giant Amazon.com (NASDAQ:AMZN). Furthermore, firm believes Netflix won’t be acquired by reported suitors The Walt Disney Company (NYSE:DIS), which is very interested in streaming, or Apple Inc (NASDAQ:AAPL) because as the bank puts it : the streaming service’s business is “too fully formed/valued” to be an appealing acquisition target.

The deal is particularly troublesome in the case of Disney where Deutsche Bank estimates that such a deal could lack a “strategic rationale” and the acquirer may face “severe economic/earnings dilution.”

“Netflix would, naturally, provide a new source of earnings growth for Disney, but with Netflix trading north of 100 times 2018 earnings, the dilution would be roughly 25 percent even through fiscal year 2021,” they wrote [via Bloomberg].

Deutsche’s skeptic view comes as Netflix stock continues to struggle. Year-to-date ticker has lost nearly 9% of its value. It is worth noting that Netflix was one of the top performers in the S&P 500 in fiscal 2015, with a spike of more than 130% over those 12 months. The stock however, has been picking up recently thanks to takeover rumors. So far this month, NFLX has added about 7%.

Beyond the YTD decline of share price, the company’s metrics appear healthy overall as fundamentally Netflix shows the following financial data:

  • $1.83 billion in cash in most recent quarter
  • $10.2 billion t-12 total assets
  • $2.22 billion total equity
  • $7.62 billion in T-12 revenue
  • $122.64 million annual net income
  • ($841 million) free cash flow

Additionally, Netflix seems ahead of rivals like Amazon or Hulu in the streaming video on-demand business at home and internationally, thanks to its original content and massive budget. Netflix has budgeted $6 billion on content this fiscal year alone.

Trading Measures

In the past 52 weeks, shares of Los Gatos, Calif.-based firm have traded between a low of $79.95 and a high of $133.27, with the 50-day moving average [MA] and 200-day MA located at $98.20 and $96.33 levels, respectively. Additionally, shares of Netflix trade at a P/E ratio of 6.40 and have a Relative Strength Index (RSI) and MACD indicator of 62.76 and +4.95, respectively.

The company is currently valued at nearly $45 billion. Approximately 5 million shares have already changed hands, compared to the stock’s average daily volume of 10.14 million.

Of the 39 analysts following the stock, 21 rate Netflix stock ‘Buy’, 12 recommend ‘Hold’, whereas the rest suggest a ‘Sell’ rating. The 12-month median consensus is $110 with a high target of $130.

Year-over-year, Netflix shares are down by nearly 8 percent at just under $104.

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