Netflix (NFLX) stock just can’t stop. But it needs to.
Shares of the streaming video service continue to go bonkers in 2015, and NFLX stock hit all-time highs yet again this week after Guggenheim gave Netflix stock a “buy” rating and a $160 price target.
Of course, just a few months ago, that number would’ve sounded a lot less impressive. Lest we forget, NFLX just underwent a 7-for-1 stock split on July 15. So what currently is a reasonable-sounding $160 price target would’ve been an adjusted $1,120 based on Netflix’s $690 share price.
Regardless, $160 is an awfully bullish target.
Here are three reasons the expectations for NFLX stock are simply too bullish, and why investors should proverbially check themselves before they wreck themselves.
Valuation
When you try to value NFLX by traditional means, you get absurd numbers. Like a flummoxed physicist frowning at the math surrounding black holes (rabbit-hole concepts like infinity crop up as solutions), even a calculated investor could lose himself dealing with Netflix’s multiples.
But whether physicist or investor, you’re gonna have to face the music.
First, unless you’re the visual effects artist on Interstellar, there’s no way to fully describe a black hole with math; second, there’s no way to fundamentally value NFLX stock through traditional means.
Here’s what happens if you try to describe a Netflix stock in its natural habitat: NFLX trades at 281 times trailing earnings, and 428 times 2016 earnings. S&P Capital IQ’s proprietary algorithm says the stock is overvalued by 49%. Thomson Reuters Stock Reports also does its best to value the stock by comparing NFLX to itself. Still, it finds NFLX stock trades at more than 100% premiums to its own historical averages on metrics like forward price/earnings to growth ratio, trailing price-to-earnings and forward P/E.
The truth is that no one knows how to value Netflix with any accuracy, and every time we try to make sense of it, the numbers tell us it’s wildly, wildly overvalued.
Content Costs
One thing that is knowable: Netflix’s content costs are surging. As a first-mover in a rapidly growing industry, the inevitable flurry of rivals has now entered the market, and NFLX is being forced to compete. Amazon (AMZN) has Amazon Prime Video, Time Warner‘s (TWX) HBO has its own standalone streaming service, HBO Now, and the joint venture that is Hulu also competes in the area.
No doubt more competition will spring up, and Netflix knows that. So it’s doing the smart thing: Investing in content that differentiates it.
The problem, however, is that every streaming provider needs compelling content for viewers to obsess over, so the price of that content is skyrocketing.
As it turns out, developing your own content is pricey:
Source: ZeroHedge
Last and probably least, the final omen for NFLX stock is …
Carl Icahn Is Out
Famed corporate raider and activist investor Carl Icahn is known for acquiring big stakes in a company, then demanding massive changes in management, capital allocation or the fundamental structure of the business itself.
When he’s done shaking the tree and gobbling up all the fruit, Icahn hastily exits his position and moves on to the next. Icahn did this not too long ago with NFLX stock, suggesting that he’d re-allocated himself heavily into AAPL stock.
Icahn’s no dummy; and by saying, as he did at the time, that AAPL “represents the same opportunity we stated NFLX offered several years ago” in a tweet, he’s saying in so many words that the stock is overvalued.
I’m no physicist, but I agree.
As of this writing, John Divine was long shares of AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
