But at current prices, NFLX is a terrible stock.
Netflix beat last quarter’s expectations in every way a company can beat expectations, increasing its customer base, revenues, earnings per share and even its gross margins more than the consensus Wall Street estimates. The margin compression from increased content costs that many investors (myself included) have feared has simply not come to fruition. NFLX has been able to grow its top line via subscriber growth at a faster clip than its content costs have risen.
What’s more, Netflix has changed the way we expect to watch television. Largely because of NFLX, TV viewers now expect on-demand programming available on any device at any location at any time. Cable TV companies are scrambling to adapt their offerings to match the format of Netflix; most recently Comcast (CMCSA) — America’s largest cable TV provider and one of the biggest Internet providers as well — is now essentially copying Netflix’s format, introducing a “cloud-based” set-top cable box that will let viewers watch their favorite shows and movies on any of their devices.
And herein lies the problem. Most of Netflix’s content is reruns of old programming — programming that NFLX is competing to license with the likes of Amazon.com (AMZN), among others. And given that roughly half of all broadband Internet subscribers already have Netflix subscriptions, it’s hard to see Netflix’s growth continuing at the current pace for much longer.
Meanwhile, NFLX stock sports a trailing price/earnings multiple of 232 times and a forward P/E of 60 based on consensus estimates for 2014 earnings. Again, great company, but if you’re paying 232 times earnings for a company with a growing list of powerful competitors, you’re putting yourself at serious risk of heartbreak.