Is Netflix the next momentum name to fall?

Published Tue, Aug 11 20151:43 PM EDT

With recent market leaders Apple , Disney , Tesla , biotech, and media stocks all significantly off their highs, is Netflix the next momentum name to fall? Netflix is the undisputed outperformer this year, up a stunning 140-plus percent for the biggest gain among members of the S & P 500 . But the shares were weaker Tuesday for little reason. The fact that the stock—at $121 and change—is now above the average Wall Street 12-month price target of $116.45 compiled by FactSet, may be one reason. Even Netflix CEO Reed Hastings said on the earnings call in mid-July the abrupt rise of the stock is a mystery to him. "I think it probably shows why at least I should keep my day job and not try to be a stock picker because when the stock was half this price I described it as euphoric," he said. "So it's a mystery to me. I think I'm out of the stock commentary business." Investors who praise the company's position scratch their heads on the valuation as Netflix trades at more than 270 times trailing 12-month earnings. "Disney's report last week showed us that cord cutting is finally here. (Cable) bundle is going the way of the dodo. Netflix is reaping the rewards of this secular shift. I love the company and the business model," said David Nelson, chief strategist at Belpointe, a wealth management firm. "I just can't get my hands around the valuation. There will eventually be competition." Others are worried about the risks of leverage and low profit margin at the current price. "Netflix is the epitome of leverage. The range of outcomes is amplified not only by their embedded operating leverage, but by huge financial leverage as well," said Aron Pinson, chief investment officer at LPS Financial, a New York based investment advisor. "At current valuations if you're wrong, leverage works both ways." Some investors are looking at Netflix's profit margin as telling the real story. Its net income margin was 4.85 percent at the end of 2014, up from 2.6 percent in 2013 but much lower than other high-flying Internet peers like Facebook and Google , whose margins are in the 20 percent range. "You still have to look at the profitability of companies over the longer term," said Jeremy Hill, managing partner of Old Blackheath, an asset management firm. "It would be folly to not acknowledge that Netflix is in rarefied air." Read More Watch this trade: Amazon, Netflix set to drop? To be sure, fundamental analysts may not like the multiple, but the chart hasn't broken down yet. Source: StockCharts.com, Ryan Detrick "Netflix from a technical point of view continues to look great. Both the longer-term 50-day and 200-day moving averages are pointing firmly higher, suggesting longer-term momentum still favors the bulls," wrote technical analyst Ryan Detrick. "I wouldn't want to bet against that trend continuing." With Wall Street, investors and even Hastings befuddled by the high stock price and valuation, the one thing that keeps the stock going is the chart momentum. If Netflix ever breaks the key technical levels, watch out.

Netflix on an iPad Mini tablet computer

Ken Schafer | Getty Images

With recent market leaders Apple, Disney, Tesla, biotech, and media stocks all significantly off their highs, is Netflix the next momentum name to fall?

Netflix is the undisputed outperformer this year, up a stunning 140-plus percent for the biggest gain among members of the .

But the shares were weaker Tuesday for little reason. The fact that the stock—at $121 and change—is now above the average Wall Street 12-month price target of $116.45 compiled by FactSet, may be one reason.

Even Netflix CEO Reed Hastings said on the earnings call in mid-July the abrupt rise of the stock is a mystery to him.