Is There More Pain Ahead For Netflix?

Momentum stocks are off to a rough start to 2016 as many of them have lost considerable value and Netflix (NFLX) is no exception to it. The past few years have been great for Netflix, and the stock was even one of the best performers of 2015. Despite the strong momentum, Netflix couldn’t continue its upward trajectory in 2016 and is down almost 28% year to date.

Although a 28% dip looks compelling, I think investors shouldn’t hurry into buying the stock just yet. I believe Netflix has more downside potential and patient investors will get a better entry point in the short run. As a result, I think investors should wait for a further 10% decline in Netflix’s shares before initiating a long position.

Still Overvalued

I have been bullish on Netflix for over a year now, however I recently warned investors against buying the stock. I was expecting 2016 to be a rough year for the market, especially for momentum stocks, which is why I recently advised investors to short Netflix.

The primary reason for my short thesis was Netflix’s overvaluation. When I called Netflix a short, the stock was trading at over 340x trailing earnings. Despite the 25%+ dip since my recommendation, Netflix is still expensive and has a trailing P/E ratio of 295.

Clearly, despite the fall, shares of Netflix are overvalued, and investors have priced in years of growth. Subscriber growth in the U.S. has been one of the major driving factors behind Netflix’s meteoric rise. However, I believe the subscriber growth will eventually slow down in the coming quarters. Increasing subscription rates along with rising competition will take a toll on Netflix’s U.S. subscriber growth, which in turn will put negative pressure on Netflix’s shares.

Granted Netflix has tons of room internationally to expand its business, but I strongly believe its share price will resonate with the subscriber growth in the U.S. for the short-term. Netflix hasn’t bottomed yet and as a result, I think investors should wait for a better entry point.