Should I Buy Netflix Stock? 3 Pros, 3 Cons (NFLX)

Netflix continues to be the top dog in the world of streaming

By Alyssa Oursler, InvestorPlace Contributor

http://invstplc.com/1OphIbe

Netflix (NFLX) stock has shrugged off the indecisiveness of the market so far this year and posted a downright red-hot run. Since the start of the year, NFLX stock has gained more than 130%, including a 6% expansion during yesterday’s trading alone.

nflx netflix stockAs is usually the case with such a run, though, the question is whether it’s too late to buy Netflix stock and turn even more gains.

To find out whether there’s any more upside, let’s take a look at the pros and cons of Netflix stock.

Netflix Stock Pros

Earnings optimism: In the past three months, estimates for the current quarter’s earnings — slated to be released next week — have expanded from 5 cents per share to 8 cents per share. And full-year earnings estimates are moving upward as well, expanding from 19 cents to 22 cents over the same time period. True, both represent year-over-year declines, but the recent monster Netflix stock split is to blame there. Analyst optimism around Netflix stock is reflected in the consensus price target of $125 as well, which represents 10% upside on top of this year’s red-hot run.

International expansion: One reason for the ongoing upwards momentum is the fact that Netflix has been successful at taking its streaming service and launching it across the globe. The most recent letter to shareholders read:

“In Q2, we eclipsed 65 million members, with over 42 million in the US and 23 million internationally. We are at the forefront of a wave of global Internet TV adoption and intend to make our service available throughout the world by the end of 2016.”

And being at the “forefront of a global wave” isn’t just talk. In the second quarter, international revenue grew nearly 50% year-over-year even though the company didn’t launch any new international markets. There are new markets on tap, too: Netflix is slated to launch in Spain, Italy and Portugal in the fourth quarter alone.

New pricing: The nice boost Netflix stock got yesterday was thanks to news that the company is again increasing the price of its standard subscription service — upping it $1 to $9.99 per month for new subscribers. That extra dollar could indeed add up as the company expands. Plus, Netflix’s impressive and award-winning original content gives new users all the reason to pay an extra buck per month for the service.

Netflix Stock Cons

Valuation (vs. Earnings Growth): To say Netflix stock is “trading for a premium” may just be the understatement of the century. Currently, shares of NFLX stock sport a forward P/E of 350 and a trailing P/E of 250. The stock’s PEG ratio is laughable, considering long-term earnings growth is only 13% — less than the broader industry and sector. And the current Netflix pricetag of almost $115 represents 8 times sales and 24 times book value.

Competition: While Netflix is a leader in the streaming space, it’s still a tough and crowded space to play in. It’s not just the normal names like Hulu, Amazon Prime, HBO Go and that Netflix is competing with, either. In the most recent letter to shareholders, the company noted: “We compete with linear TV, PPV, video piracy, other Internet networks, video gaming and many other sources of entertainment.” Plus, yet another disruption could be right around the corner in the entertainment industry. Cord-cutting was one mega-trend, and Netflix got out in front of it, but the tech world moves fast.

Original programming: Okay, okay — I know I just mentioned Netflix original programming as a good thing, a driver of new subscriptions. And it is. But nothing is cut and dried, and original programming is not cheap. This is important to note because 25% revenue growth and impressive user growth is less sweet when it barely trickles down to the bottom line (as seen by the aforementioned 13% earnings growth and the company’s mere 3.15% profit margins). In the most recent quarter, content liabilities expanded from $2.12 billion to $2.56 billion year-over-year — an increase of 20%.

NFLX Stock Verdict

Despite the competition, Netflix stock is going strong and defying gravity. InvestorPlace Executive Editor Jeff Reeves pointed this out recently, writing: “Take a look at this analysis from Bespoke Investment Group, showing how Netflix actually continues to consolidate power despite its already mature business — with roughly half of customers surveyed reporting a Netflix account.”

Indeed, Netflix is consolidating power and expanding internationally — which is why the company’s valuation continues to remain irrelevant. Investors have kept piling in on potential, and the recent momentum is a sign the wild ride should continue for NFLX stock.

Alyssa Oursler is based in San Francisco and writes about technology, investing, gender and entrepreneurship. Her work has appeared on Forbes, Business Insider, MSN Money and more. You can follow her on Twitter here or check out her personal site here. As of this writing, she did not hold a position in any of the aforementioned securities.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/10/should-i-buy-netflix-stock-3-pros-3-cons-nflx/.

©2018 InvestorPlace Media, LLC