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Getting Started. Planning for Retirement. Retired: What Now? Personal Finance. Credit Cards. About Us. Something that could really blow the stock up 20 percent in a day. And at that point, that's when it's going to become a really good short because a lot of air is going to come out of the name," and fast. Want to be part of the Trading Nation? If you'd like to call in to our live Monday show, email your name, number and question to TradingNation cnbc. Skip Navigation.
VIDEO The trader maintains, however, that it will soon make for an excellent shorting opportunity. Only then would it be safe for shorts to try their luck. Disney just had its worst day since June This is one of the biggest differences between over-the-top services and traditional cable-TV.
In short, there could be multiple winners in this industry. In the most likely scenario, Netflix will grow its subscriber base in the U. Expecting the company to deliver as attractive numbers as posted in the last five years does not seem rational. Many Netflix bulls agree that growth will be slow in North America in the coming years and believe that the biggest driver of growth will be its international operations. This is not incorrect as the population with access to the internet in developing regions of the world is much bigger than in the United States.
However, the internet penetration rates in these areas still trail behind developed countries. The authorities in many of these countries are focused on building the necessary infrastructure to provide all residents wit access to the internet, but to successfully complete these projects, it could take a few years or even decades. This could become a constraint for Netflix to gain traction in these markets.
In addition, many Asian countries do not provide unlimited browsing and telecommunication services providers often apply a fair user policy , in which the speeds are reduced significantly once a few gigabytes are consumed by a user.
This is true for both mobile and fixed connections, and many analysts do not factor this into the analysis. This will prove to be a massive obstacle for Netflix to win customers in this region. Another challenge for the company's international growth will be the broadband speeds in these markets. Apart from North America, Australia and Europe, download speeds could decline drastically, which might prevent users from subscribing to high-data-consuming services such as Netflix.
The availability and usage of pirated content could prove to be a hard-to-overcome challenge in emerging markets, which is a unique obstacle the company must address. According to Tech in Asia, more than two-thirds of the population in developing countries stream content on illegal sources, as these are usually free of charge to the consumer.
Netflix will have to convince users to pay for its services, which might prompt the company to drastically reduce subscription prices. In fact, the company has already launched low-cost packages in India, which is considered one of the biggest target markets.
These cuts, however, will translate into lower revenue per user, which was apparent in the fourth-quarter results. Netflix will initially find it difficult to report attractive revenue growth in regions outside the U.
Overall, the going will be tough for the company in international markets in the future. There is no doubt about the potential for growth, but it will likely take more time than investors are factoring in today. Einhorn is also correct about Netflix burning cash at an alarming rate. The company has not made positive free cash flow since , which is now becoming a problem as growth in the U.
With the company taking on billions of dollars in debt to fund content creation, the debt-to-equity ratio has deteriorated considerably. This is not good news for investors as it increases the likelihood that Netflix will eventually run out of sufficient liquidity to facilitate debt repayments if growth slows down.
Source: GuruFocus. Since it's natural for growth companies to amass massive debt piles in the initial stages of their business operations, investors have not punished Netflix shares so far. However, this might change in the future if the company misses its subscriber growth targets consistently or if competitors gain traction and eat into its market share.
Netflix shares are overvalued, and growth will likely slow down in the coming years. However, in the long term, the company might survive the headwinds and emerge on top because of its first-mover advantage and the high quality of its content.
Even though the long-term prospects for the company are positive, this analysis leads me to conclude that in the short to medium term, the stock will come under pressure from lower-than-expected growth.
Coronavirus and Its Impact on Markets. Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here. This article first appeared on GuruFocus. Inflation is at a year high. But these Mad Money megatrends could help you fight back.
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