* Forward price-earnings ratio 165 vs sector median 14.03
* Netflix is fourth-priciest stock in S&P 500 on P/E basis
(Adds further context on valuation)
By Ryan Vlastelica
April 23 Netflix investors may be cheering after
a blowout quarter caused shares to surge on Tuesday, but the
longer-term picture is cloudy as the stocks' valuation has
reached a lofty level shared by few stocks.
The surge in Netflix Inc makes the stock the
fourth-priciest in the S&P 500 on a valuation basis, an
indication that shares may have become overextended. The stock
jumped 25 percent to $217.50 on heavy volume, the biggest daily
move since Jan. 24, taking it to levels last seen in September
The surge came a day after the company said it added more
than 2 million U.S. subscribers last quarter, aided by the
company's steps into original content, including the Kevin
Spacey-starring political drama "House of Cards." It also posted
profits that beat expectations.
"The stock is moving up a lot higher than we think it's
worth," said Morningstar analyst Michael Corty, who believes a
fair value for the stock is $110.
"I think the business model works," he said. "I just think
the price it's trading at is assuming a lot of customer growth."
The stock is now trading at roughly 165 times estimated 2013
earnings per share, compared to the average for the sector of
about 14. Only three other S&P stocks have loftier multiples:
Vulcan Materials Co at 402; Prologis Inc at 210;
and Amazon.com Inc at 182.
The current P/E ratio is more than three times the ratio the
stock had when it was near its previous all-time highs in 2011.
Analysts at Dougherty & Company expressed caution about the
share price, writing that "the company certainly has momentum,
but with margins remaining under pressure...we can't make the
valuation case to chase the stock here."
The firm affirmed its "neutral" rating, writing that
"despite the first-quarter progress we're remaining on the
sidelines until the path to double-digit operating margins
Netflix is also trading well over its intrinsic value, or
what Thomson Reuters StarMine believes a company's stock should
trade at based on its most likely growth trajectory over the
next decade or more (with steady growth assumed after that).
According to StarMine data, Netflix would have to drop 84
percent from current levels to reach its intrinsic value of
The stock has more than doubled thus far in 2013, climbing
135 percent, and the big run-up has likely hit short sellers,
who profit from betting that stocks will fall by borrowing and
then selling shares, waiting for the price to drop so they can
buy them at the lower price.
Tony Wible, an analyst with Janney Capital Markets, believes
the long-term prospects for Netflix, with its position as the
market leader, make it an attractive investment even at its
current valuation. "I think a traditional valuation is a
dangerous thing to use here," said Wible, who has a "buy" rating
on Netflix shares and raised his price target on Tuesday to $250
There are still many betting against the stock. The short
interest position in Netflix for the most recent period, from
the end of March, was 13.4 percent of shares outstanding,
compared with less that 2 percent for blue chip companies such
as Google Inc and IBM Corp, according to
Short interest in Netflix peaked at about 38 percent in
Jeff Morris, who helps oversee $272 billion in assets as the
head of U.S. equities at Standard Life Investments in Boston,
said the stock was "seeing a bit of an extreme reaction" today,
even though "it is putting up good subscriber growth and seems
to be delivering on original content."
Nonetheless, analysts rushed to up their earnings forecasts
for the stock, expecting the exclusive content to boost margins
in coming quarters. They also lifted their targets for the stock
price, which has now more than quadrupled in the past eight
months, though it remains more than 35 percent under its
all-time closing high, reached in July 2011.
At least eight brokerages, including JPMorgan, BMO Capital,
Morgan Stanley, Barclays and Oppenheimer & Co, raised their
price targets on the stock by as much as $75 to as much as $250.
"The solid performance in the March quarter combined with a
better-than-expected outlook for the June quarter, aided by the
upcoming release of 'Arrested Development: Season 4,' augurs
well for the company in 2013 and beyond," BMO Capital Markets
Corp analysts said.
"Arrested Development," a cult favorite that was dropped by
network TV years ago, will premiere on Netflix on May 26 with
the entire 15-episode season available to stream online.
The season, along with the show "House of Cards," is
generating plenty of attention for Netflix at a time when more
viewers are turning onto Internet video downloading.
"Four billion hours were streamed in the quarter -
highlighting how the company's subscriber base is increasingly
using Netflix for a growing share of their viewing trends," BMO
Netflix now has 29.2 million U.S. customers for its
$8-a-month U.S. streaming service, the largest part of its
(Additional reporting by Sayantani Ghosh in Bangalore; Editing
by Dan Burns, Rodney Joyce, Lisa Von Ahn and Leslie Gevirtz)