Friday, April 1, 2011

Value In Growth: Netflix

Netflix (NFLX) offers its customers both DVD and internet streaming of movie and television content. It is widely credited for the demise of Blockbuster, the movie rental company that went belly-up last year.

Shares of Netflix have been on a tear lately, having increased more than 700% since the beginning of 2009. Once the market has recognized a stock like this, it is a great time to jump in on the bandwagon!

Investing in Netflix is also a very low-risk venture, as the stock's beta is only 0.48. As such, even if the market falls dramatically, investors in Netflix will be relatively protected, as the stock will only fall by roughly half as much as the broader market.

There are many who argue that Netflix is overpriced, as its P/E now flirts with 80 despite new competition coming online, and the upcoming expiry (and much higher renewal costs) of some of Netflix's content distribution agreements. But as they say on CNBC, "price is truth", and so as Netflix recently closed above its 5-hour moving average it is poised to continue to rise.

Besides, at the company's current growth rate, its P/E is not high by any stretch. Netflix has more than tripled its profit over the last three years. Projecting that growth rate forward, its P/E would only be around 25 in three years, which is rather low for such a high-growth company. Considering Netflix's subscriber count is just 20 million versus the world's population which approaches 7 billion, there is still plenty of room to grow into its P/E.

Clearly, Netflix is offering strong upside potential with limited downside risk. Investors not part of the crowd that has already jumped into this stock should get in before it really rockets upward.

April Fools!

If you caught ten or more investing errors in the above article, you are probably a value investor!

Disclosure: Author is a customer of Netflix, but would not touch its shares at the current price


Marley Chunger said...

Awesome, as I read it I was wondering if you had lost your mind. Great job.

Anonymous said...


Paul said...

haha. awesomeness.

Justin said...

You got me. I read the first two paragraphs and then I was like...let me scroll down to see if he bought (ie. lost his mind). Even shorting this stock is dangerous. Can't touch this one any which way.

Unknown said...

Tilson fund closed their short position recently.

I feel it is a good sign of capitulaion and I am considering entering a short myself.


Assaf Nathan said...

Wow you almost got me there for a second...

Don't do this again !! :)

AlexK said...

That was hilarious! When you said it will grow into a P/E of 25 so it's OK I was thinking you'd lost it.

optionsnut said...

agree with many above. First thought was "has he lost his marbles?". Do i have to remove his blog from my reader!

Nice. way to keep us on our toes.