Speaker 1: So obviously, this leaves a lot of shape. I mean, investors flocking towards the stock, not wanting to miss out on any returns as Netflix stock buy. Let’s dig a little deeper. We’ll talk about the basics of the stock, the business model, fundamentals, risks, and whether I consider it a buy. Welcome back.
And I know a lot of people have been interested in Netflix stock. I mean, the companies even got its own damn say known around the world, Netflix and Chill. I was going to use it in the thumbnail, but not too cheesy. So let’s start with talking about the company itself and what’s happening with Netflix. Netflix is an entertainment company founded in the United States that provides streaming media video on demand online and DVD by mail. You can pretty much cross out that last one because no one under the age of 50 uses DVDs by mail. So Netflix allows people to stream a bunch of different videos. And 2012 they started producing their own content, which was a big thing for the firm. And since then they’ve produced a massive amount of the online content. I mean, two years ago in 2016, they produced an estimated 126 original series, and we can only assume that they have produced a greater number than that since then. We’ll move on to the business model, which is in essence quite beautiful, harnessing the power of the Internet.
They operate on what’s known as a subscription based model, meaning users pay a monthly fee to subscribe and in return they get to watch the content on Netflix. I mean, the thing about the business model is they have pretty much no extra fees for an additional subscriber. Many of the more subscribers Netflix gets, the more effective the business model becomes. And the business model is pretty effective at the moment, with over 125 million subscribers as of April 2018. So at the moment, all flowers and rainbows. But I’m going to have to stop being real with you guys. Now, there are a number of things that make me feel very, very edgy if I were a Netflix shareholder. Let’s start with the company’s debt. If we look at the long term debt, it’s just been increasing year in and year out. It’s gone from two point three billion in 2015 to six point five billion in 2017. So almost triple in just two years. But the total long term debt and obligations rec up to a massive number, over 20 billion. Now they’re making you content years and some of it is successful, but they’re borrowing a truckload of money to make this new content and that makes things extremely risky. Or Netflix shareholders better hope that the original content becomes more successful and brings in a lot more money. I mean, the risk with holding all that debt is rising interest rates, which could really put the company under a lot of pressure. Now, let me know in the comments if you think it’s a smart idea for Netflix to borrow this much money. But I know Buffett certainly wouldn’t think so. And to be honest, neither do I. Let’s move on to something else, though.
The numbers one CEO of Netflix is selling for price of three hundred and forty nine dollars. And for this year you’ll get a whole one dollar twenty five in return. Now this gives it an insane PE ratio of 279. What this means is the stock earnings beat her while growing. To be fair, it has been going well from twenty two million in 2015 to five hundred fifty eight million in 2017. But remember, this was a period when the economy and the stock market did really well. What happens when the economy starts flattening out or decreasing debt? We’ll talk about soon. Now, I wanted to make this point. The average P e ratio in the US stock market over time is around 15. For Netflix to get this average, they need to grow the earnings from a dollar twenty five to twenty three point three dollars. And that’s just to be on average terms. That’s a ton of growth to hope for. But I’ll leave it to you to decide if you think they can do it. And the other thing I wanted to mention is that we are in the late part of the economic cycle. This is the part of the cycle where discretionary stocks thrive because consumers have a lot of money. And what most people do when they get extra money is find a way to spend it. Monkey see, monkey run. That’s what the most of the world does. They’ve never heard of investing and they don’t want to hear about it because it means you have to save money. Most people on the channel hopefully won’t like this, but I’m sure a lot of the friends do. Now, Netflix is a great thing for people to buy when they have leftover money, which is a reason why Netflix has done so well. Now, tell me what happens when there is a recession and people don’t have this leftover money. They drop things that they don’t need, things like Netflix subscriptions. What happens next? As Netflix reports, bad earnings and investors run for the hills, panic happens and the stock drops. Maybe then I will consider buying it, but until then, I’m good. Netflix is a stock that has high risks associated with it at the current price. They’re selling that. That is my main issue with the stock. Also the high amounts of debt. I’m staying the heck away from it. Does that mean Netflix stock will drop? Of course not.
No one knows for sure what will happen. Especially in the short term, I could definitely say Netflix report great earnings in the next couple of quarters and the stock increased dramatically, but in the long term, it’s just too risky and the rewards are great enough for me to take that risk.
The last thing I wanted to point out, other types of investors who own Netflix, as you can see, mainly mutual fund holders. And this is a big reason why I advocate for picking individual stocks, because if you go with active management or index funds, you’re going to be highly exposed to risky stocks like Netflix. If you want to hold a high percentage in stocks like these, then go ahead. But I’d prefer to pick individual stocks.