Netflix (NFLX) is still growing. Investors just stopped paying a tech price for it.
Shares of the streaming giant sank Friday after its third quarter revenue forecast came in below expectations, extending a slide that has cut the stock nearly in half since last summer.
The business did not collapse. The valuation did.
Netflix’s price-to-earnings (P/E) ratio once topped 70 times expected profits and still stood near 45 times a year ago. It has since fallen to 18.5 times. That drop has pushed the streamer below both the technology and communication services sectors.
A price-to-earnings ratio shows how much investors are willing to pay for each dollar of expected profit.
Netflix’s expected earnings have continued to rise. Investors are simply attaching a lower price to them as revenue growth cools from roughly 16% to 13%.
That is the shareholder trap.
A company can keep adding sales and profits while its stock falls because the future no longer looks exceptional enough to support the old price.
Michael Burry, the investor made famous by his bet against the US housing market before the financial crisis, offered a blunt way to frame Netflix’s problem.
“Disney produces wine. Netflix produces milk,” Burry wrote Friday.
His argument is that Disney (DIS), Pixar, and Warner Bros. (WBD) own more evergreen content that can retain or gain value across generations. Netflix must keep replenishing a library whose hits often have a shorter shelf life.
Great for tonight. Less valuable 10 years from now.
The more Netflix resembles a media company that must continually replace its product, the harder it becomes to justify a technology-style price.
Still, Wall Street has not pushed Netflix all the way into the traditional-media bin. The stock trades below Roku (ROKU), Spotify (SPOT), and the technology sector on expected earnings. It remains above Disney, Fox (FOX, FOXA), and Comcast (CMCSA).
Bloomberg Intelligence analyst Geetha Ranganathan said the weaker forecast and unchanged margin outlook “overshadowed an otherwise solid quarter.”
As earnings season gets underway, Netflix offers an early look at the risk facing richly priced stocks.
It is a tough neighborhood. Good results can protect the business. Only exceptional results protect a high valuation.
Jared Blikre is the global markets and data editor for Yahoo Finance. Follow him on X at @SPYJared or email him at jaredblikre@yahooinc.com.
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