As is often the case following Netflix, Inc.’s (NASDAQ:NFLX) quarterly earnings releases, the stock made waves after reporting a stellar fourth quarter Wednesday afternoon. Shares were up double-digits in after-hours trading, and closed Thursday’s trading with a gain of 3.8%. They even hit an intraday all-time high of $143.46.
The company beat on both the top and bottom lines, with earnings of 15 cents a share and 35% revenue growth to $2.48 billion. Wall Street had been expecting earnings of 13 cents a share on revenue of $2.47 billion.
But the most impressive news was the fact that Netflix recorded its biggest jump in subscriber growth in history. The streaming company added 7.05 million new memberships, which was largely driven by international markets. More than five million accounts were opened overseas (versus 1.93 million domestic), and NFLX still has plenty more room to grow — a great sign going forward.
Management gave upbeat subscriber guidance for the current first quarter, expecting to add another 5.2 million subscribers. They also reaffirmed the company’s intentions to produce 1,000 hours of premium original content this year, which is up from just 600 hours in 2016.
There’s no question it was a good report, and I cannot argue with the growth story here. Netflix dominates the streaming content industry and its growth should only continue at a high pace. However, there are several reasons why I don’t believe it is an attractive buy right now.
First, while the company was able to best Wall Street’s expectations in all four quarters last year, the magnitude of the fourth-quarter beat is much lower than usual. The first three quarters of 2016 saw the company bring in double the per-share earnings estimates. This time, the beat was only by two cents.
Then there’s the valuation. Netflix is expected to earn $2 a share in 2018, which based on current prices around $140 gives it a price-earnings ratio of 70. Based on 2017 EPS estimates, its forward P/E is 140. And even if we were to look out to 2020, when earnings are expected to come in at $5 a share, the P/E remains elevated at 30.
I’m not saying that a stock can’t continue moving higher with an elevated P/E, but I am saying that based on this valuation NFLX is not a great buy at these levels. I do like the stock as a pure momentum play or a swing trade on a pullback, but strictly as a value play I would stay away.
Matthew McCall is founder and president of Penn Financial Group, an investment advisory firm. Matt also is Editor of FUTR Stocks and the ETF Bulletin. Earlier this year, Matt and Hilary Kramer teamed up on Breakout Stocks where Matt serves as the Co-Editor. Most recently, Matt and Hilary joined forces again. This time, they are helping individual investors make money trading ETFs. For more on their latest project, visit www.etfedgesummit.com.
