Is Netflix, Inc. Stock’s Rally Overdone?

Gaining more than 40% over the course of a year is a fantastic performance for most companies, but for leading streaming service Netflix, Inc. (NASDAQ:NFLX) it’s just a simple month’s work.

Investors in NFLX Stock Need to Walk Away From the Table

You read that right. Less than one month into 2018, Netflix stock is up a whopping 41%. And that’s on top of the 55% return the stock enjoyed in 2017.

As a member of the famed FAANG group — Facebook, Inc (NASDAQ:FB),, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL), Netflix and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) — the company is often compared to the other technology darlings when it comes to performance and valuation. But in reality, there is no true competitor to NFLX. There is no other company even in the same stratosphere as far as popularity and business model goes.

From a valuation perspective, NFLX stock is trading with a forward price-to-earnings ratio of 62.9, which I’ll admit does sound high at first. However, because of the company’s above-average earnings growth, its PEG (price-to-earnings/growth) ratio is very acceptable at 1.2 — well below the market average.

The actual earnings numbers are impressive as well. Wall Street expects the bottom line to come in at $2.66 a share in 2018 and explode to $8.83 a share by 2021.

Key Factors Drive NFLX Stock Higher

It’s common knowledge that earnings drive stock prices over the long run, but when it comes to Netflix there are a few other metrics that investors also love to analyze.

Subscriber growth is actually the most important factor for companies that generate revenue from subscription fees. NFLX added 8.3 million new streaming members in the recently reported fourth quarter, bringing the total up to 117.6 million. Management had previously forecasted 6.3 million new subscribers, so the huge beat — which included better-than-expected results both domestically and abroad — was a surprise to investors.

It was also likely the reason for the big gap up in the shares after the report was released.

Revenue is another key metric here — and for any company that is still in the early stages of having its cash flow to the bottom line. Netflix’s top-line result was better than expected in the fourth quarter and showed growth of 32.6% year-over-year. It was also better than the third quarter’s 30.3% increase. Accelerating revenue growth attracts money and therefore leads to higher share prices over time.

Looking at the chart, there’s no question that NFLX stock is overbought in the short term. But that shouldn’t be surprising after such a strong and quick run. I do expect a brief pullback in the near term, but after that, the stock will once again be a buying opportunity.

My long-term outlook is bullish on Netflix stock and I believe that reaching the $300 milestone is certainly possible in 2018.

Matthew McCall is the founder and president of Penn Financial Group, an investment advisory firm, as well as the editor of FUTR Stocks and the ETF Bulletin. Matt just launched two new investment advisories focused around the “next” generation investing theme. His trademark three-prong investing approach targets the mega-trends old Wall Street is missing out on. Click here for more information on the “NexGen” Experience.

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