BARRON'S: Netflix could fall more than 50% by the end of the decade

House of cards season 2 frank underwoodNathaniel Bell for NetflixNetflix is ‘chiefly a hit-renter, not a hit-owner,’ Barron’s said.

Barron’s magazine forecasts that Netflix stock could fall by more than 50% by the end of 2020. 

Sure, Netflix is one the so-called FAANG stocks that are growing quickly and driving much of the stock market’s gains. Its stock has multiplied 69 times on a split-adjusted basis over the past decade. And, its monthly streaming service is popular and growing faster than expected.  

But content-wise, Netflix is “chiefly a hit-renter, not a hit-owner,” Barron’s Jack Hough wrote in the August 12 cover article. And that’s its biggest weakness. 

Here are some of Barron’s key arguments: 

  • Video is expensive, and Netflix is running low on cash to make or buy blockbusters. Netflix expects its cash burn to be between $US2 billion and $US2.5 billion this year, up from $US1.7 billion in 2016. And it’s financing this with a lot of borrowing  — it holds $US4.8 billion in long-term debt. 
  • Disney’s decision to exclude its new content from Netflix starting in 2019 is “troubling.” Netflix’s bids for licensed content would increasingly be harder, Barron’s said, because many content owners have already signed deals with its competitors like Hulu. 
  • Netflix’s accounting practices — like not categorising a canceled show as a write-down — may be understating how high its costs are. 
  • Netflix isn’t generating enough cash to justify its valuation; it’s trading at 146 times its estimated 2017 earnings, according to Bloomberg. 

Netflix shares fell 5% last week after the Disney announcement and news that Facebook was launching its own slate of original video content

But Barron’s covers are jokingly called a contrarian indicator in some financial circles, and for good reason. Just look at the magazine’s September 2015 forecast that Alibaba would fall 50% — the stock has surged 135% since that cover. 

Barron’s cover was released just before news of a major coup by Netflix: the company poached Shonda Rhimes from ABC Studios after a 15-year relationship that yielded shows including “Scandal” and “Grey’s Anatomy.” 

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