On the heels of this Monday's massive upside surprise on its Q4 2017 earnings report, where Netflix (NASDAQ:NFLX) showed eye-popping subscriber growth, most analysts are recommending just one thing when it comes to the company's stock: keep buying.
But with shares trading at $261.30 as of yesterday's close, up 14.8% since the start of the trading week, perhaps some holders of Netflix stock are asking themselves whether now might not be the right time to take some profit. After all, what are the odds that the company will continue to surprise so extraordinarily in coming quarters?
Consider this: there’s a very strong bullish case backing up analysts' buy calls. Netflix simply crushed expectations earlier this week after this largest online entertainment network reported its best year of subscription growth so far, adding 24 million customers in 2017.
For the final three months of the fiscal year, Netflix added 8.3 million subscribers compared with expectations for 6.4 million. That huge jump brought its global viewers to 117.6 million.
These robust additions boosted fourth-quarter sales to $3.39 billion, while earnings almost tripled to $0.41 a share from the same period a year ago.
This is an incredible growth story for the video streaming company, at a time when traditional media giants are struggling to keep their viewership intact and going through a massive shakeup.
For investors, Netflix has proven to be a great investment. After surging 55% in 2017, shares are up more than 25% in the first three weeks of this year. The stock is the top performer among the FANGs, the acronym used for high performing, mega-cap technology stocks, including Facebook (NASDAQ:FB)., Amazon (NASDAQ:AMZN), Netflix, and Google (NASDAQ:GOOGL).
What’s Next for Netflix?
One thing investors must understand is that you shouldn't take a short-term approach when investing in an entertainment company.
The biggest factor that will keep subscribers loyal to Netflix is the quality and uniqueness of its content. And that means a lot of cash burn for development and a long horizon before seeing Netflix achieve meaningful profitability.
Reed Hastings, co-founder and CEO of the company, understands this very well. He plans to spend as much as $8 billion on programming this year, and another $2 billion on marketing Netflix content. The company also intends to increase its non-English programming, with productions in 30 local languages in 2018.
This huge undertaking will force Netflix to borrow heavily which will compromise earnings growth. Netflix will burn about $4 billion in cash this year and add more to its debt load, which currently stands at $6.5 billion.
Plus, the success of Netflix has its problems, too. Other media giants with deep pockets are getting ready to challenge the company's dominance.
In October, Disney (NYSE:DIS) said it plans to launch a streaming video service to rival Netflix in late 2019 with thousands of hours of movies and television content. Disney intends to price this extremely robust service "substantially below" the monthly rates Netflix charges, according to Disney's Chief Executive Bob Iger.
Netflix last year increased the monthly subscription fee for its most popular plan by $1 to $10.99 a month. Netflix raised cost of its premium plan by $2 to $13.99. It didn’t increase its $7.99 monthly price for the basic one-screen, standard definition-video plan.
Is There More Juice Left to Squeeze?
During the past five years, Netflix investors benefited from a remarkable run. Netflix stock surged more than 900%, producing more than double the gains generated by Facebook and Amazon shares during the same period.
Nevertheless, I don’t see that rally sputtering anytime soon. Customer stickiness to Netflix service in the U.S. market even after its October price increase shows that the company can significantly improve its bottom line by raising rates going forward.
And the picture on the international front is even more encouraging. Netflix expects the bulk of future growth in subscriptions to come from global markets—about 77% of the total 6.35 million customers the company expects to sign up in the first quarter.
With a trailing price-to-earning multiple of 209, and shares pushing toward $270, Netflix stock looks very expensive. But if you just focus on the very rich PE multiple, you’re likely to miss the bigger picture. Which is Netflix inherent ability to become a global media giant.
I will hold on to Netflix stock despite the temptation to book some profit at these levels. As far as I can tell, the party has just begun!