Netflix is facing a ‘recipe for disaster’ after downgrade

Netflix and chill?

At Needham, it’s more like Netflix and sell. The firm’s downgrade on Tuesday of the stock to underperform from hold painted a grim picture of the streaming company’s near-term outlook: Analyst Laura Martin predicted Netflix would lose as many as 4 million premium U.S. subscribers in 2020 amid growing competition in streaming.

Shares of Netflix fell by more than 3% Tuesday in response to the call, adding to their nearly 7% decline since the start of December. The stock, which was rising slightly in Wednesday’s premarket, is up a meager 9.5% for 2019.

Despite the company’s recent successes — namely its Golden Globe domination and the strong viewership numbers for Martin Scorsese’s “The Irishman” — industry professionals largely agree that Netflix’s near term isn’t exactly motion picture worthy.

“Even though it had a nice 24% rally in September and October, the stock was already rolling over before Needham downgraded the stock today,” Matt Maley, chief market strategist at Miller Tabak, said Tuesday on CNBC’s “Trading Nation.” “My concern here is that we’ll retest that trend line going back to those September lows of $290.”

“A break below that level would certainly raise a yellow warning flag on the stock,” Maley said. Netflix shares closed at $293.12 on Tuesday.

The strategist added that Netflix wasn’t in the clear even though its moving average convergence divergence indicator, which tracks momentum, was indicating that its recent decline could be slowing.

“On a longer-term basis, the stock has formed a symmetrical triangle pattern, and looking at it, it’s kind of at the lower part of that pattern,” Maley said. “If it breaks below that lower line, which is … basically at about 260 right now, that’s going to be a problem and that’s going to change the flag from a yellow one to a red one.”

For Maley, the absolute “line in the sand” for Netflix was its late-December 2018 lows around $250.

“You break below that, we’ve got some real problems,” he said. “So, things better turn around for Netflix next year or the momentum issues are going to catch up to them on the stock.”

Quint Tatro, chief investment officer of Joule Financial, was also concerned about Netflix’s year ahead.

“I actually agree with the downgrade. I’m not so sure I agree with the rationale,” he said in the same “Trading Nation” interview. “While I have no idea what subscribers will drop off, my concern is the valuation, and I think that investors are waking up to the fact that this company is not nearly going to grow as fast as the earnings are projecting.”

With Netflix shares trading at a sky-high 93 times price-to-earnings multiple, Tatro worried the company wouldn’t be able to make good on that valuation.

“You’re paying 60 times forward earnings for a company that now is leveraging up their balance sheet to pay for content,” the investor said. “This is a recipe for disaster, in my opinion, and I think that the next quarter we’re going to see probably stagnant to low earnings growth, and then that’s going to come home to roost on this valuation metric, and I think investors will not be willing to pay for growth at these multiples.”

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