Netflix, Inc. Stock Prices Are Shaky at Best, Here’s Why
I have harped on poor Netflix, Inc. (NASDAQ:NFLX) for ages in regards to its valuation, which I have described alternately as “insane” and “ridiculous.” Yet I thought I might at least try and justify NFLX stock price valuation, just to make sure my analysis is unbiased.
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Looking at last quarter’s earnings, here is the view I have with NFLX stock price. I see TTM net income at $359 million. The previous TTM net income was $140 million, so it is nice to see an increase of over 150%.
Now, some might say that this alone justifies a 150x multiple. I disagree. For growth stocks, of which NFLX stock sort of qualifies, you have to look at the longer-term trend, as well as present context.
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Indeed, with NFLX stock at a market cap of $84.6 billion, it trades at a PE ratio of 235. So even if you think a 150x PE ratio is justified, tell me how you can justify 235. I’m listening, and holding a bottle of whiskey in order to enjoy myself as you spin your tall tale.
NFLX Stock vs. AMZN Stock
But wait! What about Amazon.com, Inc. (NASDAQ:AMZN). It trades at a PE ratio of 275! That’s true. I’ll get to that valuation in a moment.
NFLX stock revenues increased 35%, up to ten billion dollars. So on a price-to-sales ratio, NFLX stock trades at 8.4x. Amazon, however, trades at only 3.5x revenues.
This is where we see the first disconnect. The second comes in the form of operating and free cash flow. AMZN has $17 billion in operating cash flow. NFLX stock burned $2 billion in operational cash flow. AMZN has $8 billion in FCF, and NFLX has negative $2.1 billion.
There you have it. Essentially, AMZN trades at a lower P/S ratio because its revenues are making a much greater impact and translate to cash flow. Amazon is here to stay and operating on many different complex levels to grow and change the world.
NFLX is burning cash to pump out content in the desperate hope of remaining relevant as more streaming services come online.
This is not to say that Amazon stock is fairly valued. Investors just see more long term potential. While NFLX can’t justify its current stock price, there is some justification for a reasonably high price, just not where it resides now.
Over the long term, NFLX hopes to build a content library. These libraries are of long-term value, particularly since NFLX content is exclusive to itself. I don’t see NFLX itself being bought out at this valuation by some third-party.
However, if cash gets tight, NFLX can and will begin to license its own content to other providers. They have to walk a tightrope so as not to give away reasons for people to abandon subscriptions, though. They also have to do this amidst increasingly tighter pricing competition.
Yet the very long term play is for a third party to just buy up all of Netflix’s content at some point. This could even occur at it spends billions on new content so as to keep adding fresh material.
Bottom Line on NFLX Stock
I believe there would be a market for much of this content, and the buyer would have to have deep pockets. That makes me think The Walt Disney Company (NYSE:DIS), Alphabet Inc. (NASDAQ:GOOGL), or Apple, Inc. (NASDAQ:AAPL).
So as far as how to play NFLX stock, it depends on your risk tolerance. If you are an aggressive speculator or trader, go for it. Buy with stop losses. If you are more prudent, buy the stock and sell covered calls, or sell naked puts, and take on a bit less risk.
Or you can just avoid it entirely.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns DIS stock. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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