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Netflix, Inc. Stock Is Expensive Because It Really Is That Good!

NFLX stock - Netflix, Inc. Stock Is Expensive Because It Really Is That Good!

Source: Vivian D Nguyen via Flickr (Modified)

With great success comes even greater scrutiny. That’s the reality that faces Netflix, Inc. (NASDAQ:NFLX). No matter how many aggressive risks they’ve taken that has gone right, no matter how high the NFLX stock price is, naysayers seemingly outnumber the supporters.

But in all fairness, as NFLX inches forward, it begs the question, how much higher can it go? If you take InvestorPlace contributor Luce Emerson’s perspective, the answer is, not much.

The overall premise is that the NFLX stock price trades at an excessive premium. Fundamentally, it’s hard not to agree. As Emerson mentions, Netflix shares are priced at 188-times trailing earnings. Against forward earnings, NFLX is priced 87-times. Both metrics are in the stratosphere for global media firms.

More critically, management continues to invest aggressively into original content. Executives already faced criticism for spending $6 billion in the current fiscal year. More eyebrows were raised when Netflix announced that it will spend $8 billion for the following fiscal year.

So far, the investments have paid off where it counts the most: the markets. On a year-to-date basis, NFLX stock gained more than 53%. It potentially could gain more now that some of the nearer-term volatility appears to have died down. Still, Emerson openly wonders about investors’ “comfort levels” with NFLX, considering that returns on content spending are difficult to quantify.

Emerson argues that attributing valuation based on the power of original content is more art than science. Thus, “the NFLX stock value proposition for viewers comes from the library; the sheer vastness of its existing content in addition to the seemingly continuous slate of new programs NFLX has produced and developed in-house.

So, it’s the aggregate entity on a sleek and user-friendly platform that people are paying for.”

NFLX Stock Hits All the Right Notes

I agree that measuring return-on-investment for original content is an art. However, we should also keep in mind that virtually everything associated with the markets is art, not science. If Wall Street was a science, no one would make any money. Science necessarily means that functions are predictable and repeatable.

So no, I cannot predict with absolute accuracy that the NFLX stock price will rise based on its content investments. Nor can management guarantee to repeat their earlier successes. However, these uncertainties shouldn’t dissuade us from taking a shot on NFLX.

We see the obvious trend. Consumers are cord-cutting, not cord-attaching.

Currently, Americans who are “attached” to traditional media services pay an average $99 monthly bill. I happen to be among the traditionalists, and I pay DISH Network Corp (NASDAQ:DISH) dearly for the privilege. I also happen to drive a stick-shift car, so I suppose that I have an “old school” personality.

Nevertheless, I can’t deny the price savings that Netflix offers. While I constantly receive junk mail from AT&T Inc. (NYSE:T)-owned DirecTV, the satellite-TV wars are a pathetic joke.

I know from personal experience that when their low introductory rates are over, I can expect a sky-high, triple-digit bill. But even the introductory rates don’t hold a candle to Netflix’s premium plan rate.

Some folks have raised a stink about Netflix raising their membership pricing. What they may be forgetting, though, is that the company can get away with it. Consumers love their original programming, and new members are jumping onboard, either through advertising efforts or word-of-mouth.

Such organic power to draw in new customers classifies NFLX stock as a moat, in my opinion. I know many companies that would kill for that kind of leverage.

Everybody’s Playing Catch-up to NFLX

I’m also confident for Netflix’s future because the entire media industry is hurling towards streaming content. We all know about Walt Disney Co’s (NYSE:DIS) plans to launch its streaming service. Media empire Comcast Corporation (NASDAQ:CMCSA) has responded, and will continue to respond with their own iteration.

Of course, Netflix has the first-to-market advantage. Not only that, this advantage sustained over the years. Unlike the “BlackBerry Ltd (NYSE:BB) effect,” consumers were seduced by Netflix’s streaming technology, but they stayed for the content. Given that this fundamental driver has only improved (and dramatically), it’s going to be difficult for competitors to dethrone NFLX.

While I respect opposing views, I don’t support the thesis that the NFLX stock price is unsustainable. Sure, the premium is rich, but shouldn’t it be? When you have a dominant business like Netflix, investing in the later stage of the game doesn’t come cheap.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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