Stocks
by Zviad Maisuradze on May 26, 2020

Netflix (NFLX) Stock Drops by 3% as Company Deletes Inactive Accounts

During the Tuesday trading session on the New York stock exchange, the shares of Netflix (NFLX) fell by 3%, dropping all the way down to $416.76 level.  The move came after the company management announced its plans to delete thousands of inactive accounts. According to those statements, the subscriptions to Netflix will also be canceled for those clients as well. The main idea behind these decisions is that those consumers who no longer use their services won’t be charged on a monthly basis. In the short term this step can slightly reduce company revenues. However, for a longer timeframe this can be beneficial for the firm’s reputation and sales as well. After all, not all companies show such concern for customer’s interests.

Netflix is also different from the majority of other corporations in another sense. Rather than facing heavy losses during the COVID-19 pandemic, it gained 16 million new subscribers. According to the first-quarter report, the firm’s revenues during this period have reached $5,768 million. This number in fact was 27.6% higher than a year ago. It is highly likely that after the ending of lockdowns, the growth rate of companies sales might be more moderate. However, still, it does not change the fact that Netflix had a very profitable first quarter.

                                                                                                                                                                                                source: cnbc.com

This dynamic also had a significant impact on share prices. As we can see from the above, in September 2019, the stock hit bottom when trading just above the $250 level. After this development, the share price has risen steadily, even managing to recover from the stock market crash in March 2020 and reach an all-time high of $450 in May. Since then the price has moderated a little bit and nowadays NFLX trades close to $417 mark. Still, this level is more than 25% higher than at the beginning of the year.

Are Netflix Shares Overvalued?

As we have seen from the above example, the performance of Netflix shares has been quite impressive. Unlike the heavy majority of S&P 100 companies, the market capitalization of the firm is higher than just before the outbreak of the COVID-19 virus. However, many investors have an obvious question: Are Netflix shares overvalued?

To answer this, let us take a look at some numbers. According to the latest reports, the earnings per share of the company stands at $4.66. Consequently, at the moment, the price to earnings ratio of the firm stands at 89.4. It goes without saying that the stock is extremely overvalued on a P/E basis. The firm does have an impressive growth rate of income. However, even if EPS was to rise by 26%, the stock will still be deep into overvalued territory.

Netflix has never paid a dividend, so it is not necessary the best choice for income investors. The beta of the stock is 0.97. This suggests that its level of volatility is very close to that of the S&P indices. Another problematic indicator for the firm is the debt to equity ratio, which has recently exceeded 174%. This might not be an urgent problem for the management, however, if this is left unaddressed at some point in the future, the company can have a hard time repaying its liabilities.

By Zviad Maisuradze

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