Netflix (Nasdaq: NFLX) reported its fourth-quarter earnings on January 20. Strong growth in earnings, revenue, and subscriber growth, including figures that showed the company’s efforts to expand into other countries was paying off, caused the stock price to soar. Since that time, the stock price has jumped 36.20%, and is now less than 2% lower than its all-time high.
Figure 1. Source: Market Realist
I argued that Netflix’s stock price would increase in an article titled “Netflix Stock Forecast For 2015 Based On A Predictive Algorithm” on January 9. The article explained the cyclical nature that Netflix’s stock had displayed over the years, and that the stock was ready to climb back after a rough 2014. Stocks had climbed 278% higher in 2013, and increased spending and subdued subscriber growth caused the stock to falter during the second half of last year.
Netflix’s stock price seems to always overvalue or undervalue the company, swinging from one extreme to the other. Now that the stock has climbed back to touching distance of its all-time high, the stock will most likely fall in the coming months, as it is currently way overvalued once again. Netflix’s current P/E ratio for the trailing 12 months is 109.97, which is astoundingly high compared to its competitors.
Figure 2. PE Ratios For Netflix, CBS, and Time Warner Cable.
Besides the high stock price, Netflix also announced further expansion. The company hopes to have the streaming service available in 200 countries in the next two years, with the service set to be launched in Australia and New Zealand by the end of March. It also recently announced that it will be launching in Japan in the fall, the first Asian market it will enter.
Netflix hopes to finish its international expansion within the next two years while remaining profitable. But the international operations are still unprofitable as it invests heavily in expansion. The international segment will most likely become profitable by 2017 or 2018 at the latest, but until then, it will eat into profit margins, potentially worrying investors.
The company is also ramping up spending on original content and content from providers in the face of rising competition from the likes of Amazon (AMZN, Financial), Hulu, and HBO. Netflix plans to spend $3 billion on content this year, and this will also harm the company’s profit margins. These rising costs could cause the stock to fall again, as another shock is not out of the question. A poor quarter with lower than expected subscriber growth, along with these rising costs, would cause the stock to fall.
Even though the company might be slightly overvalued currently, it is still positioned well for the long term. The underlying trends in the market are very good for the company’s potential growth. More and more consumers are cutting the chord from cable and using streaming services such as Netflix, which is the clear leader in the market. Plus, increased subscriber growth for services like HBO and Hulu are not bad for Netflix, as it views these companies more as compliments to each other instead of competitors.
Meanwhile, the progress in international markets has been impressively strong. The company launched operations in France, Germany, Austria, Switzerland, Belgium and Luxembourg in September of last year, which gives it access to a potential market of about 66 million broadband homes. The streaming service has also seen promising progress in Latin America, where it revealed it surpassed 5 million subscribers during the past quarter.
Algorithmic Forecast For Netflix
I Know First supplies financial services, mainly through stock forecasts via their predictive algorithm. The algorithm incorporates a 15-year database, and utilizes it to predict the flow of money across 2000 markets. The algorithm has more data to forecast within the long term and, naturally, outputs a more accurate predication in that time frame. Having said that, intraday traders, along with short-term players, will also benefit by taking the algorithmic perspective into consideration.
The I Know First algorithm was able to correctly predict the behavior of Netflix’s stock around the time of the earnings report. Figure 3 is an I Know First algorithm prediction made on January 13th, 2015. The self-learning algorithm uses artificial intelligence, predictive models based on artificial neural networks, and genetic algorithms to predict money movements within various markets.
The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions. The middle number is indicative of strength and direction, not a price target. The bottom number, the predictability, signifies a confidence level.
In this forecast, Netflix had a signal strength of 10.04 and a predictability indicator of 0.41 for the one-month time horizon. In accordance with the algorithm’s prediction, the stock price increase 46.19% over that time, during which the earnings report was released.
Figure 3. I Know First 1-Month Forecast From January 13th.
Algorithmic Forecast For 2015
Having demonstrated how I Know First’s algorithm was able to correctly predict the movement of Netflix’s stock price earlier in the article, it is worthwhile to see if the algorithm agrees with the bullish fundamental analysis of the company. Figure 3 includes the one-month and one-year forecasts for Netflix from February 19th, 2015. In the one-month forecast, Netflix had a negative signal, indicating the algorithm is bearish for the stock in the short term. Meanwhile, the signal strength is exceptionally large and positive in the one-year forecast, signaling that the stock is overwhelmingly bullish in the long term.
Figure 4. 1-Month and 1-Year I Know Forecast For Netflix.
Conclusion
Netflix’s stock price has been extremely volatile in recent years, soaring to record highs before crashing, only to repeat itself. Currently, the stock is closing in on an all time high, and is most likely to experience a pullback, as investors will look to take their profits in the face of increasing costs. Even Netflix CEO has acknowledged the extreme behavior of the stock in the past, noting that there are times when the stock is riding a wave of too much “euphoria.” I would advise investors to avoid this stock for now, but be on the lookout for an opportunity in the future when the stock price falls. As history has shown us, the stock will rebound to record high prices, providing massive upside potential for investors on the lookout for the chance.
