Tesla Motors (NASDAQ:TSLA) shareholders can learn a lot from what happened to Netflix Inc (NASDAQ:NFLX) stock after NFLX reported Q2 earnings this week. Netflix is the perfect example of the dangers of buying a stock with an incredibly high valuation and equally high market expectations.
What happened to Netflix?
After being the single best-performing stock in the entire S&P 500 in 2015, NFLX is down sharply in 2016 while the market is making new all-time highs. Last year, NFLX delivered an incredible 134.4% return. However, after hitting an all-time high of $133.27 back in December, NFLX is down 35.5% in the months since.
The problem NFLX investors are now facing is the deadly one-two punch of an expensive stock and unreasonably high expectations. Back in Q1 earnings season, NFLX delivered the following numbers:
· Q1 EPS beat of $0.06 versus Wall Street estimates of $0.04
· Q1 revenue of $1.96 billion, in-line with Wall Street estimates
· Q1 U.S. subscriber growth beat of 2.23 million versus Wall Street estimates of 1.82 million
· Q1 International subscriber growth beat of 4.51 million versus Wall Street estimates of 4.49 million
Sounds like a pretty spectacular quarter, complete with strong growth and 24 percent year-over-year revenue growth. The stock crashed nearly 13% the following day. Why? Despite all the impressive numbers mentioned above, NFLX delivered Q2 subscriber growth guidance of 2.5 million versus Wall Street’s expectations of 4.0 million.
Mind you, NFLX was planning to add 2.5 million subscribers in three months. The only scenario in which that type of incredible subscriber growth is considered bad news is when expectations are sky-high.
Fast-forward to this week, and history pretty much repeated itself. Once again, NFLX beat on EPS and delivered in-line revenue, and once again the bottom fell out of the stock. NFLX produced Q2 subscriber growth of 1.68 million. Again, revenue was up 31% compared to last year and adding nearly two million subscribers is impressive growth. But it was not good enough for the market.
Even after NFLX’s big 2016 swoon, the stock is still trading at a forward PE of 85.0 and a PEG of 13.2. It is also still generating negative free cash flow. In other words, the stock is still far from cheap. In fact, it’s still far from reasonably-priced in terms of traditional stock valuation metrics. There is plenty of room for downside if NFLX continues to disappoint the Street.
What does this have to do with Tesla?
TSLA may be…
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