2 Expensive Stocks to Buy Now, and One That’s No “Daily Deal”

Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The market has roared to life this year and is now at all-time highs, leading many investors to fear that the search for good, cheap stocks is futile. Is value investing dead? Not likely. But just because the market’s up doesn’t mean all the “expensive” stocks are bad investments.

Let’s take a look at a few and see if we can find some “expensive” value.

Back to the future?

Netflix (NASDAQ: NFLX) has spent the past few years doing something that very few companies ever do - disrupting its own business. And while this, along with some well-documented foibles by management (Qwikster, anyone?) has made for a tough ride, it’s hard to argue with the decision to go all-in on streaming as DVD subscriber numbers continue to decline. It’s pretty clear by our viewing habits that streaming, and its convenience, is winning the battle for eyeballs.

Netflix’s $270 share price extrapolates to a very high valuation; it’s forward PE is 168, while the TTM PE is a nearly offensive 631. So why should you buy?

In a word? Growth.

Management told us that the path to growth would be painful, as it would use free cash flow and profits to pay for expansion, and limit using debt. One only has to look at the most recent quarterly earnings report to gain better insight.

International streaming revenue has grown over 300% in the past year, and now accounts for 14% of total revenue. And while international streaming as a whole is still losing money, management says that each market will take about a year to turn profitable. This alone, based on TTM results, is worth $380 million to the bottom-line just at break-even for international streaming. And while it’s not as simple as drawing a line from this contribution to net income, look at it in context: At the stock’s height, the company peaked at $225 million in net annual income. We are talking about an additional $380 million, just at break-even for international streaming. Compelling? If not, maybe this will be.

The company has only missed its quarterly forecast four times in the past 29 quarters. That’s nearly eight years of consistent accuracy. Say what you want about Reed Hastings and team, but they know their business. And they are telling us these new markets will be profitable. I’m inclined to believe them.

Competition not getting it done

A Hulu independent of its studio and cable operator owners was something that deserved attention. However, 21st Century Fox, Comcast subsidiary NBC Universal, and Disney deciding to not sell the streaming service seems more likely to keep it from ever reaching its full potential. To paraphrase, the best way to kill a disruptive company is ownership by committee – especially a committee of competitors.

Strong evidence is Disney’s recent big deal with Netflix, and not Hulu. Sleeping with the enemy? Not really; if anything it’s Disney’s recognition that streaming is an important media outlet, and by partnering with Netflix versus its shared interest in Hulu, its competitors/partners in the Hulu venture don't benefit from Disney’s valuable IP. It’s exactly these sorts of deals; Netflix getting the keys to the Magic (streaming) Kingdom, that point towards continued success down the road.

Not the deal of the day; Google it and you’ll find it

I’m a fan and a user of Groupon (NASDAQ: GRPN).  However, I also use Living Social, and find myself more and more attracted to its offers than those of Groupon. Heck, we get inundated with “deals” emails all the time, and at best, Groupon seems destined to get caught up in mediocrity and inability to differentiate itself from the “daily deals” crowd.

This market also includes a heavyweight like Google (NASDAQ: GOOG), a place where people are already in the habit of going to look for stuff. Just by its diverse nature of offerings, Google may be a better fit for businesses looking for more than just a “daily deals” marketing partner. Let’s face it: Until Groupon grows up and starts delivering consistent results, it’s a speculative investment at best.

While Google is another high-priced stock with a TTM PE of 27 (though the forward PE is a more reasonable 23,) and a price to sales ratio a stratospheric 6.2, we have years of proof that it can predictably execute growth and profit. And much like Disney to Netflix, the diversity of Google’s many revenues streams adds a level of downside protection that a one-deal pony like Groupon can’t match. I can’t think of a company more tied to our connected lives than Google, and one that is able to generate revenue from me nearly every time I use my PC, tablet, or smartphone. And to think that I never actually give Google any money is simply amazing.

But with annual revenues and net income up 155% and 115% respectively in the past five years, it’s pretty clear Google’s monetization of search through advertising is working. Self-driving cars are another extension of this: think about it- that’s another hour per day that we get to spend online while our cars drive us to work. It’s all part of the Google master plan to keep us plugged in. And it’s working.

Foolish bottom line

Price and value often do go hand-in-hand. But that doesn’t mean that you have to shop in the bargain basement for the best deals. Sometimes the best analysis is to step away from the spreadsheets and look at the real world. Which of these companies will be larger and more a part of more consumers' lives in five years than they are today? While that’s not all you need to look at, it’s every bit as valuable as any metric you can use.

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Jason Hall owns shares of Google and Netflix. The Motley Fool recommends Google and Netflix. The Motley Fool owns shares of Google and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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