Netflix, Inc. (NFLX)’s High Valuation Shouldn’t Not Concern Investors

Netflix Inc (NASDAQ:NFLX)

Netflix, Inc. streaming service turned it into a momentum stock, which in just five years jumped from over $8 a share to more than $133 in late 2015. Now, the stock’s momentum seems to have lost steam with it down over 21% year to date.

netflix inc nflx

Despite the recent drop, the stock is still trading around 320 times (X) its earnings, and its forward price-to-earnings multiple is also around 90x. Critics believe at such a valuation, even a slight hint of slowdown can create havoc for the investors.

Is high valuation a concern? Probably not

Probably, there are two reasons supporting Netflix’s high valuations. First, the expectations that the subscriber’s growth will remain robust, and second, the revenue will continue to rise as the streaming firm expands in and outside the US.

On the positive side, Netflix, Inc. is not the only highly valued company, Amazon too enjoys a similar valuation. The online retailer trades at 290 times its earnings. Despite having an expensive valuation, Amazon’s stock has appreciated tremendously over the years (over 255% in last five years). This implies that even for Netflix shareholders it is possible to see a price appreciation despite the premium valuation.

However, the only challenge is, unlike Amazon, Netflix does not have a diversified revenue stream. But, this has not deterred the analysts from going bullish on the streaming firm. Among the Reuters analysts covering the stock, 8 consider it a BUY, 1 see it as a SELL while 14 rate it a HOLD. Also, it has plenty of catalysts to carry its growth forward.

Amazon – not a threat to Netflix

Rival Amazon – a day before Netflix’s quarterly earnings spoiled the mood by announcing a stand-alone monthly service that will offer Amazon’s unlimited video streaming catalog to Amazon Prime subscribers at no additional cost. However, Netflix CEO – Reed Hastings – and management are not at all concerned, and they shouldn’t be.

Hastings is not at all deterred with Amazon’s move; infact he sees this as good for the streaming industry in general. In an interview, after reporting the Q1 numbers, the CEO noted that the market is witnessing a “natural evolution from linear TV to Internet TV.” Hastings believes the growth in the number of streaming service providers will actually force the viewers to go for ‘cord cutting,’ and this is good for their market.

“Their growth doesn’t take away from us,” the CEO said during the earnings call. Hastings even praised the rivals for their efforts, saying, “Hulu is doing some great work; Amazon is; HBO; Showtime…..There are so many competitors and everyone is working hard to build the best content. We are seeing growth in the overall Internet TV market that is displacing linear TV, so it’s natural that everybody is coming in as they realize that the future is Internet TV.”

Setting aside the current sentiments on the stock, Netflix, Inc. surely does have a revolutionary and solid business model. Though its current valuation may not allow the stock to reverse the downtrend quickly, the future for Netflix and its investors is surely bright.

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Aman is MBA (Finance) with an experience on both marketing and Finance side. He has work as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, playing PC games and cricket.

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