Of all the stocks known as FANG, it is Netflix Inc. (NASDAQ:NFLX) that has delivered the greatest return to investors. Over the last five years Facebook Inc. (NASDAQ:FB) is up almost 680%, Apple Inc. (NASDAQ:AAPL) is up almost 61%, and Google, now Alphabet Inc. (NASDAQ:GOOGL), has risen 155%. Netflix, the N in FANG, is up a spectacular 2,222% in value. It opened for trade September 29 at almost $181, a market cap of $78.02 billion.
That’s a market cap on par with Time Warner Inc. (NASDAQ:TWX), which AT&T Inc. (NYSE:T) is in the process of buying. It’s almost 60% more than Twenty-First Century Fox Inc. (NASDAQ:FOXA), at $48 billion, and nearly 4 times the value of venerable CBS Inc. (NYSE:CBS), at $23 billion.
But if you buy the stock today you are not getting that glorious past. You are buying Netflix’ future, at a price to earnings ratio of 221. You’re paying almost 9 times its 2016 sales of $8.83 billion.
Still want in?
Everybody Loves Netflix
Most analysts following the stock will say yeah, you do.
Of 43 now following Netflix 24 have it on their buy lists. Only three are saying sell. Wells Fargo & Co. (NYSE:WFC) is typical, expecting it to widen its lead.
Why buy a company whose median earnings estimate for 2018 is $2.02 per share, a forward P/E, the price you’re paying for next year’s earnings, of 90?
In this decade, Netflix has gone from being a company that sends DVDs in the mail to the dominant U.S. video network, a streaming service whose content investments are followed more avidly than those of any Hollywood studio, because is spending is huge. It recently agreed to pay $400 million just to make shows in Canada. It’s making syndication, or second-run deals, that used to go to regular TV.
Depending on a Competitor
For the price being charged for Netflix, however, I would like a company whose future is independent of others, at least one that owns its own infrastructure.
Netflix doesn’t. Instead its movies are stored and delivered from the infrastructure of Amazon.Com Inc. (NASDAQ:AMZN). Netflix has a program called Open Connect that lowers its last-mile costs, what it pays local ISPs to deliver its content, but the core remains Amazon Web Services.
Pardon me if I have a problem with that. Amazon is Netflix’ primary competitor. They just launched Thursday Night Football. Their list of Prime Video and TV offerings is almost as impressive as Netflix’ own. And if you’re paying roughly $10 per month for Amazon Prime shipping, it’s free.
What do all these competitors have in common? They own their own infrastructure in the form of clouds, the data centers that are at the center of everything happening in technology today.
The Bottom Line
By contrast, Netflix is just a video company. Their business is to buy the rights to video and sell you the right to see them. That’s all. For all Netflix’ power and past gains, the company has less than 20% of the market cap of any of these competitors.
Sure, you can say that Netflix has climbed bigger mountains in the past. It used to be smaller than any TV network, and now it’s worth more than any of them. Its relationship with Amazon is firm, and maybe it can arbitrage the others to keep it that way. Maybe it could sell out to one of them.
Maybe. But not at these prices. If I owned Netflix, I’d be taking my profits.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and FB.