Netflix, Inc. Has Long Way To Fall From Top of Its Mountain

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Since I last wrote about Netflix, Inc. (NASDAQ: NFLX ), views on the streaming giant have taken a turn.

The Federal Communications Commission's (FCC) move to end "net neutrality" and increase carriers' power over what people access has made Netflix a battleground stock.

Some insist this will only increase the company's power in the U.S. market because, while services like Comcast Corp. (NASDAQ: CMCSA ) might demand payment for allowing it access to customer lines, Netflix could threaten to shut off Comcast access, as cable channels do, and put the shoe on the other foot.

Others see competition, in the form of Walt Disney Co. (NYSE: DIS ), cooperating with cable giants to take Netflix down. Our James Brumley is among those concerned.

In any case, uncertainty now dogs the stock. Since my last article on it premiered , the stock is down 5%.

The Truth Behind Netflix's Hype

The truth is more prosaic. For Netflix, the U.S. is just one market. The company long ago solved carriers' concerns with Netflix Open Connect , and it is unlikely to be impacted.

Netflix even has a way to deal with the U.S. studios, partnering with them on international distribution.

On the other hand, there are reasons for concern. Some people are being burned out on Netflix. The average viewer used the service almost 20% less in 2016 than in 2015, watching 480 hours per year, down from 570 hours. Competition for time from Amazon.com, Inc. (NASDAQ: AMZN ) and Hulu , which is owned by the TV networks which also own Comcast and AT&T Inc. (NYSE: T ), is increasing.

But competition for dollars isn't yet happening. People are paying for multiple services as they cut cable cords and rely on Internet streaming for their entertainment. They use Netflix in many ways - binging some shows, savoring others.

The Real Problem for Netflix

The real problem for Netflix isn't the FCC or cable-fed competition. It's the sheer cost of content and the problem of profitability.

If Netflix hits its whisper number when it reports earnings next year, it will have brought in nearly $12 billion in revenue, and $1.26 per share of earnings, for all of 2017. That's nearly triple the earnings on a 30% jump in revenue, compared with 2016.

But content costs keep increasing, and Netflix keeps borrowing money to maintain its content pipeline. By the end of the year, the company will have about $6.4 billion in debt, on $17 billion in assets. Its debt-to-assets ratio has been climbing steadily, and cash flow has been deteriorating.

The idea is that a big library can sustain the company for years to come , and this was true for the great movie studio libraries of the past, which were able to collect cash in various ways on classic films. But it's not nearly as true for the TV networks, which get less syndication revenue from cable than they used to from non-network TV stations. You may watch The Maltese Falcon again and again. Will your kids do the same with House of Cards ?

Bottom Line on Netflix

As NFLX expands its global footprint, its near-term prospects remain great. But if you're looking for long-term gains, you might want to consider some history.

People are fickle. Their tastes change. Technology can also change, rapidly and unexpectedly. Netflix' rivals are in trouble right now because they stayed with old business models and didn't change with the times.

Netflix has pioneered a new business model, and gained enormous power, but now it must hold that business, and that power. You're paying 180 times earnings for Netflix stock today, and its market cap is 6.6 times its revenue. Once it sees the top of the mountain, it's a long way to fall.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time , available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.comor follow him on Twitter at @danablankenhorn . As of this writing he owned shares in AMZN.

More From InvestorPlace

The post Netflix, Inc. Has Long Way To Fall From Top of Its Mountain appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.