Netflix Inc. (NFLX), one of the most spectacular tech stocks over the past decade having soared more than 110-fold over that period, has plunged close to 28% from its record closing high. Beaten down, the bears are now circling around even in spite of last week’s strong earnings report that saw both earnings and new subscriptions beat analyst estimates. Prominent voices, from traders to analysts to academics, are all looking past the recent strength and expressing their concerns over the video-streaming site’s ability to turn future profits, according to Barron’s

What Worries the Bears about Netflix

 Future profitability in doubt.
 Margin expansion behind schedule.
 Slowing sales growth.
 Unsustainable business model, based on debt-fueled growth.
 Too dependent on creating new original content for growth.

Source: Barron’s: analysts, traders; CNBC: academic

What It Means

While Netflix shares posted strong gains following the earnings report last Wednesday, those gains have since evaporated. Short-seller Andrew Left of Citron Research will no doubt be smiling, as he placed bets against the stock after the earnings report. He told Barron’s that he disliked the company’s strategy going forward, noting that, “profitability will eventually mean something.”

Future profitability was also a crucial risk cited by KeyBanc Capital Markets analyst Andy Hargreaves. After being bullish for years, Hargreaves downgraded Netflix due to a weaker-than-expected forecast for Q4 contribution profit, the company’s profitability metric that takes sales and then subtracts costs and marketing expenses. He noted that margin expansion, a key factor for driving further upside, has not kept pace with his firm’s expectations. 

Netflix Stock has Stalled

 10-year Performance  YTD Performance  Performance since 2018 Closing High
 +11,038%  +57.2%  - 28%

Source: Yahoo! Finance; CNN Money; as of 4pm EST 10/24

Declining sales growth is another worrisome factor. Gotham City Research’s Daniel Yu indicated that the company’s sales growth in Q3 slowed to 34% versus the prior quarter’s 40% growth. The decelerating growth “would suggest the stock price is ahead of itself,” Yu said.

New York University professor Aswath Damodaran thinks the Netflix business model, fueled as it is by debt, is unsustainable. They need to constantly be making more movies and original content in order to attract new subscribers, but in order to finance that new content, they keep having to issue more debt. Having burned through $2.2 billion in cash over the last four quarters, Netflix announced a $2 billion bond offering for content development and acquisitions earlier in the week. At some point they’ll hit their subscriber cap, argues Damodaran, but they can’t simply stop making new content, which is what subscribers have been trained to expect.

What’s Next

While the bears are starting to make their presence known, a recent valuation analysis by Bernstein’s Todd Juenger suggests the stock still has some upside potential. His analysis concluded that Netflix shares should be worth about $392 in 12 months from now if the company can hit the 300-million subscriber mark by Q1 of 2027 versus its current subscriber base of 130 million. But while that price target implies an upside, that upside is just 30% from Wednesday’s close based on a required doubling of the current consumer base. That leaves little room for error with relatively mild prospects for future gains.