The Wild Ride Continues at Netflix

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$32 at the beginning of 2009. Almost $300 in July 2011. About $60 in mid-November 2011, then up above $125, and below $54 at the end of July 2012. Now, six months after that date, the stock is above $140 after a quarterly report in which Netflix (NASDAQ: NFLX) announced that it had made a profit for the quarter. Analysts had expected the company to report losses. In addition, Netflix added over 2 million U.S. video streaming subscribers, strengthening its recurring revenue model.

Billionaire Carl Icahn is likely a huge winner of the earnings beat. Icahn controlled 10% of Netflix’s shares as of a filing at the end of October 2012, and the recent increase in the stock price actually understates the percentage gain Icahn Capital has made; much of that position was in the form of call options, which in this case have acted as a highly leveraged purchase of shares. See more of Icahn's stock picks. Billionaire Eddie Lampert’s ESL Investments had also initiated a position in Netflix during the third quarter, reporting a position of about 700,000 shares at the end of September (find Lampert's favorite stocks).

Netflix’s revenues were up 8% in the fourth quarter of 2012 versus a year earlier, and rose 4% on a q/q basis. While gross margins have been swelling- earnings are still down considerably from their levels in 2011, with EPS for all of 2012 being lower than they were in the fourth quarter of the previous year- many of the fears about subscriber numbers seem to have been overblown. Netflix, Inc. also has considerable cash and short term investments.

Current expectations from Wall Street analysts are that Netflix will earn 41 cents per share in 2013, though those estimates are going to be boosted in the coming weeks in light of the earnings beat; for example, consensus had been for a loss of 7 cents per share in the current quarter and our guess is that the company will actually end up being profitable. Forward estimates are for $1.44 per share in earnings, placing the forward P/E at about 100. Obviously the company would need to continue high earnings growth from that point; it would likely need to triple earnings for another year or so. As a result buying does not look like a good idea at this point.

The two closest competitors for Netflix are Amazon.com (NASDAQ: AMZN) and Apple (NASDAQ: AAPL). Apple recently plunged after a disappointing quarter, and its trailing earnings multiple is now between 10 and 11. Even if growth is over (the company actually saw slight EPS growth from a year earlier when correcting for the shorter fiscal quarter), that is a cheap multiple particularly given Apple’s cash position. As a result it seems to be a better value than Netflix. Read our most recent take on Apple. Amazon, meanwhile, has a 2013 P/E of over 100 and so like Netflix it depends on very high earnings growth over the next several years. It isn’t a good buy right now.

Netflix can also be compared to Coinstar (NASDAQ: OUTR), which operates Redbox machines, and DISH Network (NASDAQ: DISH). Coinstar’s kiosks are a less flashy business than streaming video, with the result being that the stock trades at 10 times trailing earnings. Growth expectations imply a five-year PEG ratio of 0.6, and revenue has been up. Value investors should be warned that 42% of the outstanding shares are held short, so a number of market players are confident that Coinstar is overvalued. Dish’s business has been about flat, with the stock carrying trailing and 2013 earnings multiples of 23 and 16 respectively. We at Insider Monkey want to see the company actually deliver some of that promised earnings growth before considering an investment.

We at Insider Monkey don’t think that investors should be buying Netflix following its quarterly report. While it is a positive that the company turned a profit, it has much further to go to justify the current price and revenue growth- while good- has not been particularly strong given the scale of Netflix’s earnings multiples.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in AAPL. The Motley Fool recommends Amazon.com, Apple, and Netflix. The Motley Fool owns shares of Amazon.com, Apple, 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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