Is Netflix a house of cards? “Overvalued” streamer should expect a wakeup call, says analyst

Netflix would like you to think everything is going swimmingly. At every earnings report, it discloses as few statistics as it possibly can–mostly about user growth–and then investors take the bait and buy buy buy. Just two weeks ago, it announced new subscriber records, and the stock subsequently went boom.

But shares have been a bit topsy-turvy since then, which brings us to the question of whether Netflix is overvalued. A new report from Morningstar argues just that.

According to this new analysis, Netflix is in for a world of problems as time goes on. Sure, it’s acquiring subscribers at an astounding pace, but the streaming landscape is changing almost as rapidly. Why? Competition is stiff–“not only from Amazon, but also from new well-capitalized entrants and other established local or regional players,” the report says. This batch of players includes Disney’s upcoming OTT service, as well as moves from companies like Apple and Walmart, which are all trying to get into the streaming game.

Netflix, according to lead analyst Neil Macker, is burning through cash to get these subscribers. Currently, the company is spending $8 billion a year on programming. And there is no reason to believe that number will go down. “Netflix is similar to more traditional media networks such as CBS or HBO in that it needs to constantly acquire and produce new content to both attract and retain viewers,” writes Macker. If Netflix did stop investing in new and expensive programming, he argues, we should expect to see more subscriber churn.

Meanwhile, the company will have to spend even more money as it continues to expand internationally. This will hurt its cash flow even more.

Further, Netflix is likely to be undercut by competitors. New players, writes Macker, are poised to enter the streaming video-on-demand scene–namely, Disney, which will launch a new service in the near future. And it’s very likely these new services will be priced to beat Netflix. In the past, subscribers did not take too well to Netflix raising its prices, so it’s likely that people will gravitate toward cheaper programming. This is doubly true for international markets like India, where Netflix is already considered quite expensive.

Essentially, though Netflix is resting on the fact that it has a lot of subscribers and has generally been considered the go-to platform for streaming video, Morningstar argues that things are about to change. Competition is ripe, industry prices are due for a shake-up, and Netflix will have to continue spending big money to acquire new content to keep subscribers happy.

Thus, it’s possible that the company–and its stock–will be in for some big changes as the industry tides turn. Writes Morningstar: “[w]e continue to believe that the market is overreacting to the subscriber growth, and we reiterate our $120 fair value estimate.” The stock is currently at $315, so that’s a big drop.

Disclosure: Fast Company owner Joe Mansueto founded Morningstar Inc.