Meet Kevin: The Netflix Warning to the Entire Stock Market

One of the best performing stocks over the past decade has been Netflix (NFLX). But year-to-date, it’s been one of the worst performers. The company led stocks higher in the 2010s. Now, its business model is now showing the pain in the economy now.

The company’s latest results show that it’s continuing to bleed subscribers. While the loss was less than what investors expected, it still points to trouble. Specifically, it means diminished cash flows for the streaming giant going forward.

In its most recent quarter, the company lost 970,000 subscribers. However, the company was expected to lose a full 2 million paid subscribers. That led to a bounce in shares.

Going forward, the company appears to be showing declining earnings thanks to fewer subscribers. That’s a sign that the economy is slowing. And will likely continue to slow. Even if the company can grow its earnings and revenues, it will do so at a much slower rate than in the past.

Ideally, a company will grow its earnings at a minimum of the rate of its price-to-earnings ratio. This is known as the price-to-earnings-growth, or PEG, ratio.

That implies that a company trading at 20 times earnings will see its earnings grow 20 percent in the next year if it has a PEG of 1. Right now, most big tech companies have a PEG in the 1.2-1.3 level.

The Netflix slowdown indicates that stocks may still be overvalued here, particularly  “growth stocks” that are no longer growing.

To view the full video analyzing Netflix and its importance in the economy, click here.