I like to maintain an active lifestyle. So in 2014 I invited the popular online streaming service, Netflix, into my home because I wanted to do a marathon. After all, watching TV burns 70 calories per hour.
Then earlier this week I welcomed Netflix (NFLX) into my stock portfolio. 😀
The price of oil is falling, the global economy is slowing, many countries are in recession, and company earnings aren’t growing. But none of the gloomy financial and economic news in the world today have a negative impact on the the business of Netflix. 😀
However, this is somewhat of a contrarian play. NFLX has a price to earnings ratio of over 300 so it’s not a value stock. It also doesn’t pay a dividend so everything depends on the future appreciation of the stock price. Am I bullish on Netflix? Nope. ? But I decided to buy some shares anyway as an insurance against global cord-cutting.
Cover all the bases
I believe that media and entertainment will always be a strong industry. It’s hard to figure out which media conglomerates will expand their market share in the long run so my investment strategy is to diversify and own all of the big companies. This way, I don’t have to choose potential winners and losers because I’ll profit from the entire sector. 😉 A few years ago I blogged about doing the same thing for the coffee industry where I invest in large franchises such as Starbucks and McDonald’s. As it turns out all my coffee stocks have gained over 100% in value since I bought them! I’m using the same reasoning again now. Some people watch HBO while others prefer Netflix. I don’t know which service will have more viewers 10 years from now, but if I invest in the entire sector then I should be covered. 🙂 With the addition of NFLX, my basket of media and entertainment stocks now feels complete.
Netflix currently has about 75 million subscribers worldwide, and is gaining about 6 million new subscribers per quarter. The majority of current Netflix users are in the U.S., but the company is aggressively expanding around the world. The service is now available in over 120 countries. It’s currently working out a deal to deliver content in China which could be a huge opportunity.
Here’s a look at how much bandwidth Netflix takes up. It uses even more traffic than YouTube.
It’s funny that Netflix competes with Amazon’s streaming platform, but at the same time relies on Amazon’s AWS servers to deliver its content. This demonstrates how interconnected the internet can be.
Speaking of AMZN, it’s another stock with a high P/E ratio. But it’s been that way for ages. I would value Netflix in a similar way. According to its site, Netflix spends about $1 billion a year on marketing. Instead of dramatically increasing its profits Netflix is using the rapid growth strategy where it reinvests its free cash into expanding its business like Amazon.
That being said, NFLX is still a pretty risky stock at these levels so I only bought 10 shares at $107.42 each. The most I can lose from this investment is about $1K. I would not recommend this stock to other people because I think it is way overvalued and could drop by 50% in a year or two if it starts to reach market saturation which leads to slower growth. But if most consumers don’t use cable subscriptions anymore in the future then traditional media companies like Time Warner, Corus, and Comcast may be in trouble so Netflix to me is a logical alternative solution. 🙂
Random Useless Fact
Still worth investing even with the poor exchange rate?
Probably not. But in general I don’t put too much emphasis on exchange rates when I’m speculating. The stock is priced in USD, but it’s also earns money in USD. 🙂
Will ya stop profiting from my life choices?!?! =P
Sorry. I can\’t help it. Although in this case there\’s a good chance I won\’t make any profit since the stock is already at full value.
P/E > 300 = a timing bomb.
Then I just have to get out before it explodes. 🙂
Buy and hold perhaps, it’s tested and true. NFLX = $82.79 (Feb. 02, 2016), PE = 300. AAPL = $94.02, PE = 10.
“I think it is way overvalued and could drop by 50%…”
Or much more: “It’ll crash by 90%…”
I’ll wait until I can get it for $5/shr.
The big concern for me is how much debt the company is taking on. ? If the cost to borrow money dramatically increases in the future then crashing by 90% would be the best case scenario. In the link you provided it says the shares might go to zero.
To zero because their business model is built upon running on ever increasing levels of debt instead of actual profit.
I might go so far as to say you probably bought Netflix with full expectations of losing every dollar, just so you could say you own Netflix.
Be like Munger and ask yourself if Netflix was really the best thing you could have bought with that $1,000? If the answer is no, then you made a bad decision.
That will be interesting. If that crashes I may jump in. PE 300 is way too much for my liking but at the same time, there are so many companies that have PE of 0 and get huge capital appreciations year over year. The market is an interesting breed for sure.