Netflix (NFLX) has been simply superb in 2015, posting a full double in a little more than half a year.
The run was so sweet, in fact, that most thought the bubble was going to pop after Netflix’s second-quarter earnings report.
Most thought wrong. Netflix earnings for Q2 instead had traders bidding NFLX stock even higher after the bell Wednesday, with shares up some 10% in after-hours trading, setting NFLX for a Thursday open at new all-time highs.
Let’s look at the details.
Netflix Earnings
Netflix’s second-quarter profits came to 6 cents per share — down significantly from the year-ago period’s 10 cents per share, but still enough to beat analyst expectations of 4 cents. Revenues barely missed, with sales of $1.65 billion just $10 million under Wall Street’s consensus line.
However, the most important metric anymore (at least it would seem) is subscriber growth, and there were no complaints on that front. In Q2, Netflix’s user base reached 65.6 million subscribers, thanks to 3.28 million new users acquired in the quarter. Forecasts were for 2.5 million net adds.
As should be no surprise, much of that growth came from outside the U.S., where NFLX has been pouring money. International net additions came to 2.4 million.
Expect growth to continue in the coming months — Netflix projects current-quarter net additions of 1.15 million domestically, and 2.4 million overseas.
Driving Netflix’s strong results was its impeccable content strategy, including hits such as Marvel’s Daredevil, Sense8, Dragons: Race to the Edge, Grace and Frankie and Orange is the New Black.
NFLX Stock — Buy, Or Buyer Beware?
Netflix isn’t without its skeptics. In a recent investor letter, billionaire hedge fund operator David Einhorn said he thought the company was grossly overvalued. He even mentioned that the “House of Cards Show” was “scripted to compete with Ambien” and points out that Netflix has “transitioned from being a company judged by how much it earns into a company judged by how much it spends.”
But while investors might feel that headache later, it’s the shorts who are in need of aspirin now.
After all, NFLX stock isn’t just running hot — it’s running hot at extremely extended valuations. Netflix is trading at well more than 200 times forward earnings, which compares to still-lofty P/Es of 53 for Twitter (TWTR) and 34 for Facebook (FB).
And Netflix’s gains have come in the face of ever-growing competition. Amazon.com (AMZN) is pumping up its investments in licensing content as well as creating its own series. Hulu continues to gobble up precious content. Various traditional media and cable companies, including CBS (CBS), Time Warner (TWX), Sony (SNE) and Comcast (CMCSA) — have launched their own streaming services. And the way Facebook is attacking video, you can’t help but wonder whether it will be joining the fray.
But so far, Netflix still is out ahead of the pack, and it’s not letting up. By next year, NFLX expects to be providing service in more than 200 countries.
Bottom Line
In a sense, NFLX stock is in the midst of a classic “land grab.” Sure, its valuation is ridiculous, but most of Wall Street doesn’t seem to care. Don’t expect that to change anytime soon.
Netflix has built a premium global entertainment platform. Right now, Wall Street sees a great deal of value in that.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
