Netflix: What Investors Should Do
Over the last few days, investors have seen shares of Netflix (NFLX) - Get Report fall a few percent, then quickly turn course and rise 5%, only to drop by 5% the following day. That sort of price movement can frighten shareholders and turn-off potential investors from even thinking about buying shares. But, with the right mindset and investing temperament, investors can realize massive profits from owning shares of Netflix today.
The causes of Netflix's large price swinging were two analysts' downgrades and a partnership announcement.
The first downgrade came on Tuesday morning when Needham lowered its rating from "buy" to "hold." Needham stated that it felt Netflix would see increased subscriber churn or at the very least slow subscriber growth in Europe. Furthermore the firm noted Netflix will have to deal with currency exchange issues and new costs due to proposed legal changes in the European Union which will require streaming services to fund European films.
Then later on Tuesday Netflix and Comcast Corp. (CMCSA) - Get Report announced a partnership agreement. The agreement will put Netflix on Comcast's X1 set-top box later in the year. In January Comcast had 30% or 7 million subscribers using the X1 box, but that number is expected to grow to over 50% or 11 million customers by the end of the year. While one can argue that a large portion of the already 7 million X1 box users may already have Netflix, the partnership should open the door for the streaming service to a much broader user base that now will not have to buy extra equipment or have to switch to a streaming-only device in order to watch Netflix on its TVs.
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The added convenience should at the very least help Netflix grow its customer base even slightly and it may even make customer's chose Netflix over Hulu or Amazon's (AMZN) - Get Report Amazon Prime video service.
The Netflix-Comcast announcement helped shares shrug off the downgrade which had pushed shares down to a session low of $93.31 and boost shares as high as $101.27 for the day.
Wednesday morning brought another downgrade, this time from Jefferies, sending the stock down 3.38% for the day. The firm slapped Netflix with an "Underperform" rating and lowered its previous price target of $120 per share down to $80. The main issue Jefferies sees is that it feels Netflix's subscriber growth will be weaker than what the market is currently expecting.
Weaker growth rates moving forward means the stock will have a more difficult time growing into its currently astronomically high price to earnings multiple.
Jefferies still believes Netflix has a large growth opportunity internationally, but that growth overseas will come with its own struggles such as language barriers, limited available content, payment processing, and of course broadband access in underdevelopment markets.
So, what should investors take-away from all this news be? Current shareholders shouldn't do anything. Hold on tight and avoid selling when shares fall in the future, as they likely will. For those who don't currently own shares should wait for pull-backs and begin building a position. Buy slowly over a period of a few months when the stock gets hit and don't get caught up buying during a rally due to fear of missing an opportunity.
Netflix is a great stock to own for the next five-plus years. But, the stock is going to be heading down a rocky road as growth slows and it grows into its valuation. Patient, emotion controlled investing will payoff for Netflix shareholders in the long run.
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This article is commentary by an independent contributor. At the time of publication, the author held positions in Netflix and Amazon.