Netflix’s Share Price Looks Like ‘Risky Business’
January 22, 2014 Leave a comment
Netflix’s Share Price Looks Like ‘Risky Business’
SPENCER JAKAB
Updated Jan. 21, 2014 4:51 p.m. ET
One can’t help but frame Netflix Inc. NFLX -0.40% ‘s recent fortunes in cinematic terms. “Raging Bull” or “Some Like It Hot” could describe the video-streaming stock’s 227% gain in the past year. Recall its mid-2011 meltdown, though, and a double feature of “For a Few Dollars More” followed by “The Comeback Kid” seems fitting. Netflix’s split that summer of video streaming from DVD rentals—a 60% price hike—left some customers feeling like “The Expendables.”Rewind the tape to the beginning and Netflix’s current, eye-watering valuation is in some ways more reasonable than before that episode, despite a higher stock price. By July 2011, it was trading at 6.5 times debt-adjusted market value to trailing revenue. Today it fetches a still lofty 4.5 times.
Wednesday’s fourth-quarter results could boost that if they reverse a recent slide in the stock. Analysts see Netflix earning 65 cents per share, up from 13 cents a year ago. At over 200 times trailing earnings, though, a few cents here or there hardly matters; the key figure is subscriber growth.
That helped the stock jump following third-quarter earnings in October. But chief Reed Hastingscautioned that “momentum investors” had sent the stock up more quickly than what the company might consider justified.
The market ignored him, bidding it up another 18% over the next two months. A recent, potentially negative federal appeals court decision helped bring the shares back to where they were in October.
“Apocalypse Now” it wasn’t. Still, the ruling on net neutrality could hurt. Netflix consumes nearly 30% of U.S. bandwidth during peak hours—almost 1½ that of competing services from Amazon.com Inc., AMZN +1.86% Google Inc. GOOG +1.14% and others combined.
In the longer term, fellow streamers may pose a bigger threat to Netflix dominating its “addressable market” of 60 million to 90 million U.S. households—it already reaches about 33 million. Its strategy includes expensive content deals and award-winning original shows that chew up operating cash flow.
Can Netflix grow quickly enough to make the math work? The comedy “This Is Spinal Tap” comes to mind: A musician brags lamely that his speakers are louder because they “go to 11.”
That movie, like many others, at present can only be streamed from competitors. While orange may be the new black, 11 will never be the new 10.
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