Investor Euphoria Over Netflix

Netflix (NFLX) a video streaming service, is being bruited about by Wall Street as the next big television network. It has recently surpassed Time Warner Inx. (TWX), with 31 million viewers that pays a subscription fee of $7.99 monthly. The fee includes unlimited access to movies and television series like the company’s own hit series “Orange is the New Black” and “House of Cards”. The latter was known to have won an Emmy without being aired yet on broadcast or cable TV.
Netflix reported that it quadrupled its profits, with users using five billion hours, up by 25 percent as of the 3rd quarter this year. The broadcast networks with more program hours than Netflix are the big four — ABC, CBS, Fox and NBC. The company began as a DVD rental service and became one of the largest buyers and film/television show producers at present. It spends around $2billion a year on video content by creating its own exclusive series. It is set to introduce programming of the second series of “House of Cards” and “Lillyhammer” on top of “Derek” and “Hemlock Grove.” The company plans to double its spending investments on original programming next year.
There is vast excitement about Netflix’s growth rate that dazzled investors, and made it as one of the hottest picks in town. It is no doubt, that the price of Netflix shares is high. Questions are raised whether the stocks are overvalued; or properly priced due to its impressive growth rate, coupled with company strategies of making itself as a key player in the media industry. Netflix is valued at $23 billion, after stock prices spiralled by 300 percent reaching to $381 per share.
Following its impressive earning stream in the last two quarters, the value per subscriber is estimated at $550 per share. The figure is six times of this year’s earnings, and 100 times more than what is projected next year. There is no doubt that the stock’s sterling performance is driven by investor euphoria. Henry Blodget, of The Daily Stickers, was quoted as saying that it is hard to determine if the stocks are overvalued or not. Most of those that ridicule it at $400 per share are the same people who ridiculed it at $70.
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Nonetheless, the impressive growth rate was brought about by Netflix adopting the same corporate strategy of HBO and adding a few more stuff of their own. They re-defined what television is all about, as expounded by Blodget. Netflix is piggybacking on the highly innovative infrastructures created by cable and telecom mega moths in recent years. It is estimated that around 30 percent of all downstream traffic via the internet is attributable to Netflix. The company is now investing heavily in infrastructure, sacrificing current profits, to make it a global leader in the entertainment industry too.
Netflix’s growth is akin to another giant, Amazon.com (AMZN) who has plowed back all present earnings to expansion in other platforms and product lines. Wall Street has given the company its due acclaim, recognizing the company’s indispensability in the consumer market. However, this high expectation may cause the cookie to crumble. Any dud from expectations or stumbles along the way could turn into a nasty downswing in stock prices. At some point, Netflix may be compelled to either buy or do corporate tie-ups with content producers to ensure access to original films. Deals with movie producers like Lion Gates Entertainment (LGT) are bruited about as one hypothetical deal that seems doable.
One other corporate plan is for Netflix to take advantage of its commanding lead in the market by issuing more shares of stock to enraptured and voracious investors. A number of Wall Street denizens are suggesting — sell a couple of billion dollars’ worth more of stocks to build its war chest. This would then be used for company growth in areas like – content creation, marketing campaigns, and subscriber growth.
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After hitting over 10 percent in early trading Tuesday, share price of Netflix (NFLX) spiralled downwards, burying overwhelmed investors who chased the stocks higher earlier in the day. The $400 per share was hit briefly on Monday after company profits of $0.52 were reported. However, the shares went down by more than 6 percent and closed to $330 on massive volume.
The reversal was due to public sentiment that the stocks may be overvalued. Netflix may offer great service, but stock prices are just too expensive. The fundamentals could not support the price increase unless Netflix increases the stock prices by $4 per month across the board, keep content steady, and see no customer discontent. This may be doable but still, most analysts’ think that the stock is over-valued.