Some value analysts will have you believe that price-to-earnings ratios are the most important factor in investing. But certain stocks defy P/E ratios, and Netflix (NFLX) is one of those stocks.
Trading at 333 times earnings, any good value investor would tell you NFLX is completely overcooked, destined for a crash. But NFLX has never been a slave to the P/E gods.
The stock has traded at more than 100 times earnings since March, and that hasn’t stopped it from more than doubling during that time. In fact, NFLX hasn’t traded at anything less than 75 times earnings since 2012, and at one point in early 2013 traded as high as 655 times earnings.
The last time Netflix stock traded at what might be deemed reasonable valuations was in mid-2012, back when the stock was going nowhere.
In other words, if you’re waiting for Netflix stock price to come crashing back to something that’s more in line with its earnings before you buy it, don’t. You could be waiting a long time.
Netflix Stock About Image, Not Earnings Growth
The reason NFLX has been doing so well has little to do with earnings growth or sales growth or cash flow. It’s more about image. The company has been constantly in the news this year, mostly for good reasons. Once merely a place where customers could rent old movies or binge-watch shows that they missed on TV, Netflix now produces its own content — quality content.
The company dipped its toe into original content with House of Cards several years back. Now it comes out with a new original show seemingly every week. Unbreakable Kimmy Schmidt, Orange is the New Black, Bloodline and Narcos are just a few of the Netflix-produced shows that have become hits over the past couple years.
Meanwhile, the company has beefed up its collection of movies and non-original TV shows, and expanded into countries around the world, prompting user numbers to more than double to 69.1 million from 33.3 million in the last three years.
Profits have slipped dramatically in the last three quarters, which has contributed to the lofty P/E. But sales have continued to grow every quarter, and that’s been more than enough to keep investors interested in a company that is attracting thousands of new customers by the day.
Even as companies such as Amazon (AMZN), Hulu and Crackle are producing original content of their own for Internet streaming, the extra competition has done little to slow NFLX down. If anything, it seems to have inspired Netflix to ramp up production and quality.
P/E Won’t Slow NFLX Stock Down
Netflix stock won’t rise forever. It’s unrealistic to expect another 150% rise in 2016. But it would also be foolish to bet against NFLX right now. After all, if the stock can more than double in a flat market, what might it do if stocks rally in 2016?
And if it does fall, it won’t necessarily be because of an overbloated valuation. That hasn’t mattered for years. What will matter is if the quality of Netflix’s original content starts to slip, or if the user growth slows dramatically.
Don’t hold your breath. And don’t expect that fall to come anytime soon.
Coming off a record year, Netflix stock is still a buy … even at seemingly unsustainable P/E multiples.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
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