NFLX = Shooting Star Stock ?

I have written several times about "shooting star' stocks. They usually produce a product that is well known to consumers ("everyone is buying it"), trades at a very high p/e which reflects extreme optimism for the future, and--because it has strong upward price movement--develops momentum which in turn creates further purchases. One small decline in the fast pace of earnings growth and the stock can fall to earth.

Most often these are small cap stocks making small growth stocks a particularly poor market sector in terms of risk return.

But it seems to me Netflix falls into this category. It is certainly a ubiquitous product and still has many international markets to join...and I am a member. But it seems its offerings of studio films is declining as they expand their "original content". Producing that original content" is expensive..and also extremely difficult to produce good content. And Netflix is going head to head with Amazon already. Disney is beginning its own streaming content..and Apple which already has movies for rent on itunes is eyeing this market.

Thוs Netflix with no particular comparative advantage in content,no unique technology and no huge base of consumers to cross sell its streaming service to . And Apple and Amazon have far deeper pockets than Netflix. Ironically the huge runup in Netflix market cap makes the prospect of acquisition by Apple or Amazon less likely than it might have been a year ago.

Here is a chart of Netflix vs Apple and the S+P 500 Netflix price gain  of around 130% over the last 52 weeks. The netflix gain is so large it obscures the large outperformance of Apple vs the S+P 500. Nflx p/e is 225.8

Netflix (black) Apple (blue) S+P 500 (gold)

I certainly won,t mention a prediction of the future of Netflix stock. I would say that among the oft cited FANG stocks (Facebook, Apple,Netflix and Google) it has the least unique technology or dominance in its product sector.

Yet Apple trades at a p/e of 19, google at a p/e of 65(as noted above for netflix it is 225.8). Only Amazon is above netflix in valuation at 261. But of course Amazon is dominant in many business sectors and awash in cash. It can offer its streaming service for nothing as part of amazon prime because it drives so much business to its other products. Once you are on prime you order more,are more likely to buy an alexa or kindle etc.

Easy to see the risk in this shooting star falling back to earth. Although it has led market gains its market cap is sill small enough relative to the other fang stocks (and even less so after adding in stocks like Microsoft and a few others) the impact would likely not be extreme for the market.

Some opinions on NFLX in the WSJ here 

Netflix’s Massive Rally Draws Attention of Skeptics