Shares of Netflix NFLX dipped over 2.3% on Monday after opening at a new all-time high. This slip might simply mean investors wanted to grab some profits, but it seems more likely that a tweet from infamous short-seller Citron Research caused Netflix’s intraday slump.
Citron tweeted early Monday that it thinks the streaming giant can be shorted back to $300. Citron pointed directly to a recent Financial Timespiece that focused on Netflix’s current valuation to support its new short position.
Stranger Things happening at $NFLX. Wit mkt cap up $17 BIL in a week and short interest. at 10 year low. Citron thinks the stock can be shorted back to $300. Content spend unsustainable long term. Great article today's FT https://t.co/jTM8lGoWdp Congrats to bulls, historic run— Citron Research (@CitronResearch) March 12, 2018
The Financial Times post noted that Netflix is carrying $6.5 billion in debt, which it thinks should scare investors. The piece was also very skeptical about the company’s user growth projections as it faces steeper competition from Amazon AMZN, Hulu, HBO, and soon enough, Disney DIS.
The report mentioned that Netflix is set to spend $2 billion on marketing costs in 2018, up from $1.3 billion last year, which suggests that it is harder to grab new customers in the highly-saturated U.S. streaming market. The fact that Netflix is also set to spend $8 billion on content this year was another point of contention.
If Andrew Left’s firm is correct on its new short-selling statement it would mark a roughly 8% dip from Netflix’s current price of roughly $324 per share. But is Citron actually right about this call? Let’s take a closer look.
Netflix has been on a stellar run over the last year, having seen its stock price skyrocket nearly 136%, and 74% since the start of 2018—which makes it the best performer in the entire S&P 500 so far this year. However, this surge has driven Netflix’s valuation above a figure that the Financial Times and Citron seem comfortable with.
Netflix is currently trading at 121x forward earnings, with similarly sky high P/S and P/B ratios. Yet, looking at the streaming company’s historical P/E figures, its current valuation is not that much of an outlier. Netflix was trading at 111.42x earnings at end the first quarter of 2017 and closed Q1 of 2016 trading at 194.84x earnings.
It seems relatively clear that Netflix stock is cheaper than it has been at certain points over the last couple years, but more expensive, than say, at the end of the fourth quarter of 2017 when it closed with a P/E of 83.33.
After Netflix’s insane run to start the year, many investors clearly seem convinced that the streaming company is a strong stock that they are willing to pay a premium for at the moment. And it would seem that the company’s current projections support a relatively bullish take on Netflix.
The streaming company, which is coming off a solid fourth quarter and full fiscal 2017, is projected to see its 2018 sales hit $15.89 billion, based on our current Zacks Consensus Estimate. This would mark a roughly 36% jump, while its bottom line is expected to surge over 118% to hit $2.72 per share.
Netflix is also expected to expand its EPS figure at an annualized rate of 26.7% over the next three to five years annualized. What’s more, the company has received a slew of earnings estimate revisions for fiscal 2018 recently, with nearly 100% agreement to the upside.
Netflix helped spark the streaming television revolution, and the company maintains a strong position in this industry, which is only set to expand as viewing habits shift even more to the on-demand streaming model.
This has forced Netflix, which is currently a Zacks Rank #3 (Hold), to spend more money on original content than ever before to prepare for further competition. But the competition and the spending doesn’t seem to have scared off many investors as the stock still sits just below its all-time high.
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