Should I Buy Sell Or Hold Netflix (NFLX)Stock in 2011

Buy Sell Short or Hold Netflix (NFLX) 2011

Seriously, it seems like the stock has been played up too much. Now the fate of this bullish story entirely depends on how it turns up to market expectations. Investors are getting a bit nervy on the way the management is handling queries lately. They only communicate through one channel and that is email, so investors’ concerns are very much relevant. Well, this is not anywhere close evidence that there is trouble in making but it’s surely a sign.

Why Short Sellers are eyeing Netflix?

There are market rumors that Netfix (NFLX) is overstating its subscriber base and thus mis-valuing the company.
Content costs are on a rise and Netflix will face immense margin pressures when contracts are renewed.
Bigger players are expected to enter the same market, and the competition will be immense as overall market size is not too huge.
Insider selling and issuance of debt for conducting stock buybacks is always seen as a troubling factor.

Netflix’s Cash Flow on Books is declining

Analysts’ suspect Netflix to be cooking something fishy with understated content rates, which intern build up a huge gap in the overall expenses, on the income statements. Now, there main concern is what will happen when the company starts putting those expenses on the books.

Well all these concerns are based on market rumors and lack of information support from the company. So far, the management has been successful in building up a great company and their actions tend to curb market rumors every time red flags surround them.

But this time the story is a little complicated as many things like market competition and the business model are not the same. Right now the stock has priced in too many expectations and any analyst can tell you that it is unreasonably ticking higher. On pure valuation front stocks do make outrageous moves, but it doesn’t take a stock market pundit to guess what’s next in such cases.

Is it time to book profits on Netflix (NFLX)?

Investors might be puzzled on what to do with this counter as it is riding higher and has almost tripled in value over the past two years. We have seen many upgrades on this stock as analysts expectations kept on rising all the while. Many bets were placed around the $200 mark, which the stock managed to take out easily on the back of fourth quarter results. So now the question is if the stock can continue its run in the short term?

Well, analysts’ now seem concerned over the current valuations and they feel that investors are expecting foolish levels. Some of the most illogical assumptions made by investors include:

Netflix will capture 80% market share: That’s way beyond what it can do with a subscriber growth on 45% annually.

Some are expecting Netflix to become a mainstream business, which is again not practical to expect from a niche player so soon.

Blinded by bullishness, some even think that the margins will improve going forward. Netflix can barely manage to keep them flat for a quarter or so as content costs are in a fierce upswing.

Netflix (NFLX) Investment Strategy 2011

Considering all these points, my personal belief is that smart money will start moving out of the stock and it may consolidate much lower in wait of next quarterly numbers.

The key level to watch would be around $180, which is much lower than current price. I would not recommend a short position right now but investors can offload a part of their holding and then maybe average out 15%-20% lower.

I insist that one should not go short unless he is a professional derivative trader as this stock is in a bullish trend and it might witness wild swings before the consolidation phase. Such wild swings can easily force small traders to cut their positions. So the right strategy should be to have some cash ready in-case the stock see’s a nosedive. Buying at current market rate is not going to fetch money easily.