Oh No, is Netflix Finally Screwed?

For the longest time, analysts have claimed that Netflix NFLX is overvalued. Trading between 40-50 times earnings, Netflix has been one of the golden stocks on Wall Street. With a brilliantly simple idea, Netflix has transformed itself into a media powerhouse over the years.

But things that seem too good to be true usually are. Over the last several quarters, Netflix has repeatedly missed earnings estimates. The stock would slide for a day or two and would suddenly pop back up to pre-earnings levels. There never seemed to be solid news that legitimately drove the stock's price.

That all changed on September 1, when Starz announced that it would not renew its contract with Netflix. Starz is a major content provider, but may or may not have made a significant impact on Netflix's balance sheet.

To learn more about what may happen to Netflix, Benzinga reached out to Ryan Hunter of Wedge Partners. Hunter does not have a rating on the stock, but does have opinions about its operations.

“Netflix's stock is overvalued. With this particular headline, Netflix will most likely see more downward price action.” That is exactly what happened, as the company gapped down over $20 dollars on Friday. In fact, Netflix weekly puts with a $220 strike price increased over 2,500% when the trading session started.

From an operational standpoint, Hunter believes that “the company is run well. In the long-term, not much should happen to Netflix because Starz is not a large percentage of overall content. The lack of the contract should not affect the top-line, and definitely not as much as some investors believe it will.”

So what can Netflix do? Netflix will most likely not try to open up new revenue streams, as it has successfully molded its business into a mail and streaming service. It will, however “continue to talk to business and content providers, trying to find ways to add more content to its repertoire. Its financials will probably not change, as the current costs attributed to Starz will be transferred over to another deal and another company.”

Netflix has been a Wall Street favorite since its inception. It may be overvalued to some investors, but others believe its operations have plenty of room to grow. With a terrible economic environment, Netflix may have some difficulty finding consumers to splurge on entertainment. Ultimately, it seems as if its contract with Starz will not severely affect its business.