Netflix (NFLX, Financial) is an online streaming giant that's risen to prominence over the years as the content distribution space has evolved. While it remains the dominant name in the streaming industry for the time being, its stock entered a bubble that later popped due to the Covid-19-related pull-forward in demand. Now the price has come under pressure, falling back in line with pre-Covid valuations, but I'm still bearish on the stock. Here's why.
Recent earnings
The streaming giant produced a respectable fourth-quarter earnings report earlier this month in which it beat analysts' average earnings per share target by 50 cents and grew its year-over-year revenue by 16.1%, in line with estimates.
The issue to investors that caused the near 30% sell-off wasn't so much the income statement numbers but rather the slide in subscriber growth. According to the company itself, 8.5 million new subscribers were anticipated during the quarter; however, only 8.28 million were recorded, suggesting that Netflix may be exiting its growth phase and entering a shakeout phase.
The shakeout phase
Netflix's slowdown in subscription growth could just be an anomaly. Nonetheless, growth has slowed, and the streaming industry as a whole has entered a shakeout phase where numerous competitors such as Amazon (AMZN, Financial), Disney (DIS, Financial), HBO and more have entered the fray. The shakeout phase of an industry is usually considered a period of diminishing profit margins and decreasing market dominance by the pioneers of a concept.
The only way to break through this stage and sustain growth is by acquiring or merging with companies to accumulate cutting-edge resources, which could see you outwit your competitors. Netflix has failed to acquire in enough volume during its growth phase, which could see it facing slower growth moving forward, especially considering the share magnitude of its competitors.
It's still overvalued
Even though its monopoly days are over, Netflix's stock is still overvalued versus its sector peers with its price-sales and price-to-free-cash-flow ratios trading at premiums of 2.45 times and 48.75 times industry averages, respectively.
Based on what we've seen in January, the market's proving to dislike high multiple stocks, posing another significant headwind moving forward.
Wall Street's take
Turning to Wall Street, Netflix has a Moderate Buy consensus rating, based on 16 buys, 15 holds and three sells assigned in the past 10 months. The average Netflix price target of $521.04 implies 42.20% upside potential.
Concluding thoughts
Netflix is suffering from an industry consolidation stage in which decreasing market share and the failure to acquire in volume has led to a slowdown in subscriber growth. The stock is overvalued based on sales and cash flows, and we may well see a further drawdown in Netflix's stock price amid a bearish tone from the market.
