The movie is over for Netflix

Run screaming for the fire exit if you own Netflix stock, because it's about to tumble

By InvestorPlace Apr 22, 2010 7:34AM

By Ed Elfenbein, editor of Crossing Wall Street.


family watching netflix movie on tvLots of folks on Wall Street want to know which stock to buy. Today, I want to look at the absolute worst one to buy. My friends, that stock is Netflix (NFLX).


Now before anyone says that I’m being mean to the company, please bear in mind that I’m not offering a judgment on the managers or the employees. There’s a big difference between a good company and a good stock. Netflix has a business record that anyone should be proud of. The stock, however, is terribly, terribly overpriced.


Let’s look at some numbers. Last year, Netflix made $115.9 million of sales of $1.67 billion. That works out to earnings of $1.98 a share. The stock, however, is currently around $86 or 43 times trailing earnings. The shares were overpriced at the start of the year and they’re up another 55% since then. Post continues after video:

When the fourth-quarter earnings came out in January, Netflix said that it expects full-year earnings-per-share for 2010 to range between $2.28 and $2.50. So even going by the top end of forward earnings, NFLX is still trading with a P/E ratio of around 35 which is more than twice the S&P 500. That’s just crazy.

Netflix also said that it expects revenues between $2.05 and $2.11 billion. That’s a growth rate of 23% to 26% which is slightly better than last year’s 22%. The problem with the valuation is that a lot of NFLX’s earnings growth has come from profit-margin expansion.


That’s a very good thing to have, but I’m skeptical of how much more that can improve without the company exposing itself to potential rivals like movie vending machine company Redbox. On top of that, business could be hurt by higher postal rates and the elimination of Saturday delivery. Also, companies like Walmart (WMT), Amazon (AMZN) and Best Buy (BBY) loom in the background.

Netflix’s net margins improved from 5.6% in 2007 to 6.1% in 2008 to 6.9% last year. Earnings are coming out tomorrow and it could be bad news. I have little doubt that the company will top the Street’s expectations of 54 cents pet share. In January, Netflix said to expect Q1 earnings between 47 and 58 cents per share. With the stock so high, NFLX has zero room for error. The stock is simply far too high to expect a reasonable return.


If you own Netflix, you ought to sell it as soon as possible. The next 12 months won’t be pretty.

netflix nflx stock chart




















The chart above has NFLX's stock in the blue line which follows the left scale. The right scale has the EPS line which is in yellow. The two lines are scaled at 20-to-1 which means when the lines cross, the P/E Ratio is exactly 20.


Ed Elfenbein is editor of Crossing Wall Street, a Web site about stocks and the market designed to help individual investors. Check out his free Buy List of stock recommendations. As of this writing, Ed did not own positions in NFLX.


Related Articles:

1Comment
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

122
122 rated 1
281
281 rated 2
467
467 rated 3
722
722 rated 4
678
678 rated 5
609
609 rated 6
628
628 rated 7
464
464 rated 8
269
269 rated 9
139
139 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ABBVABBVIE Inc10
ATVIACTIVISION BLIZZARD Inc10
CTSHCOGNIZANT TECHNOLOGY SOLUTIONS10
LUVSOUTHWEST AIRLINES CO.10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.