We may be going against a strong tide of bulls when we say this about Netflix (NFLX - Free Report) stock, but it is simply impossible to ignore the fact that it’s overvalued. Netflix stock is up over 20% since announcing its earnings. Subscriber count for the multimedia streaming service grew close to 5 million subscribers this quarter alone. Its subscriber base has crossed the 62 million user mark, which is impressive. The price that NFLX stock trades for, however, isn’t.
In order for Netflix to continue growing for a long time, it will need to make the deal sweeter. In other words, it will have to cut at its already limited profit margin. The company pours a great deal of money into original programming.
There are analysts who expect the subscriber growth to triple, reaching 180 million users by 2020. This is pretty improbable. However, even if that growth is achieved, it won’t be able to triple its user base without making the service more attractive. It will have to do this by having more original programming, or by cutting prices for the service, for starters. If it does manage to triple its user base, it’s likely that it won’t be very profitable at that point, especially if it does so by 2020.
The volatility of currencies abroad is something that could stand to hurt the company over time. Netflix experienced this pain just this past quarter, with the strengthening of the dollar. Since Netflix doesn’t charge its users abroad in dollars, the company is completely vulnerable to the volatility of foreign currencies. In this way, the strong dollar could stand to hurt Netflix over time, since it has to convert international revenue from foreign money into dollars.
The reason why Netflix is such an unreasonable buy at this point is because of its price to earnings, which trades at a massive multiple of 156.13. It’s simply too steep to accept, especially so when you factor in the fact that it has a lagging PEG of 7.64. It has a price/cash flow of 9.54. It also has a below average price/sales of 5.26. When you add in the fact that this stock has a net profit margin of 4.09%, you realize that Netflix doesn’t have a lot of room to sacrifice margins in exchange for growth.
Netflix holds a Zacks Rank #3 (Hold). The stock has had 6 negative estimate revisions by analysts for this quarter. 90 days ago, our earnings consensus estimate expected EPS of 1.04. Since then, though, our consensus has shrunk, now calling for EPS of $0.82. The year over year earnings growth estimate from this quarter is -29%. Netflix reports its earnings on 7/20/15.
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