BREAKING NEWS Scottsboro Fire Chief: One person shot by deputy at Jackson County Courthouse Full Story
STREAMING NOW: Watch Now

Netflix sinks 9% on a bad day for tech stocks

Wednesday was a bad day for high-profile tech stocks, but Netflix had it worst of all.Netflix (...

Posted: Oct 25, 2018 4:55 AM
Updated: Oct 25, 2018 4:55 AM

Wednesday was a bad day for high-profile tech stocks, but Netflix had it worst of all.

Netflix (NFLX) shares plunged more than 9%, about double the losses suffered by Facebook (FB), Amazon (AMZN), Apple (APPL) and Google (GOOG). The entire Nasdaq index closed down nearly 4.5%.

Broadcasting industry

Business and industry sectors

Business, economy and trade

Companies

Digital and streaming video

Internet and WWW

Internet broadcasting

Media industry

Movie and video industry

Netflix Incorporated

Streaming media

Technology

Banking, finance and investments

Financial markets and investing

Securities trading

Stock markets

Company activities and management

Company earnings

Financial performance and reports

Financial results

That's a big blow to a company that just a week ago was celebrating a strong quarter. Netflix added about 2 million more subscribers than expected when it reported earnings on October 16. The stock surged by nearly 14% during after-hours trading that night.

The wild swings explain part of the company's current problem. Trip Miller, managing partner at Gullane Capital Partners who has a short position on Netflix, said "high flyers" in tech often get punished severely on days when the entire market slumps. Netflix is trading at about $300 per share now, and some analysts have set price targets that are much higher.

"They tend to come down faster and harder," Miller said of those types of stocks.

There are other reasons to be skeptical of Netflix, said Miller, who as a short seller is betting that the stock will fall.

Mounting debt is one issue: The company announced Monday that it plans to take on $2 billion in new debt by offering unsecured bank notes, a measure it says may be needed for content acquisitions, production costs or other investments.

All told, Netflix could spend anywhere between $8 billion and $13 billion on content this year, according to reports from the company and outside research firms.

Netflix needs to spend a lot because the streaming market is getting more crowded, and the company will likely have less licensed content to round out its library. Disney (DIS), which is releasing a service next year, is pulling its content from Netflix ahead of the release of its service.

During its most recent earnings, the company said it expects negative free cash flow of $3 billion this year, and it has similar expectations next year.

"We don't see a path for them to get to cash flow neutrality, let alone cash flow positivity," Miller said.

Miller has other long-term concerns, too. International subscriber growth comprised the vast majority of Netflix's additions last quarter, while domestic growth has nearly topped out. He said the company could run into trouble if it ever hits a significant roadblock with audiences overseas.

There's also a risk when a company invests in this much original content, Miller added. Netflix isn't a legacy company, so it is often working on projects that aren't yet proven brands with audiences.

"They're going to spend billions of dollars on projects that nobody's heard of before, and I think that gets very dangerous," he said.

Netflix told investors last week that it knows its content investments have been huge. In a letter to shareholders, the company said it has "high confidence in the underlying economics" of that strategy.

Executives also batted away concerns about the looming competition, at least for now.

"Some day, there will have to be competition for wallet share — we're not naive about that," CEO Reed Hastings said during an investor presentation this month. "But it seems very far off, from everything we've seen."

Article Comments

Huntsville
Few Clouds
89° wxIcon
Hi: 93° Lo: 69°
Feels Like: 91°
Florence
Clear
92° wxIcon
Hi: 96° Lo: 70°
Feels Like: 95°
Fayetteville
Clear
86° wxIcon
Hi: 93° Lo: 66°
Feels Like: 87°
Decatur
Clear
89° wxIcon
Hi: 95° Lo: 67°
Feels Like: 92°
Scottsboro
Clear
88° wxIcon
Hi: 93° Lo: 66°
Feels Like: 93°
WAAY Radar
WAAY WAAY-TV Cam
WAAY Temperatures

Community Events