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Netflix, Inc. (NFLX): Still Growing, But Is It All Priced In?

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Since their last earnings report, Netflix, Inc. (NASDAQ:NFLX) has nearly doubled, as the company proved to the markets that the diminished expectations were far too low.  Now analysts see revenue rising by about 18% annually for the next two years, as Netflix’s streaming video service continues to experience tremendous growth all over the world.  My question is: are all of these good things priced in?  That is, after the rally of the past few months, is it still a good time to get in?

About Netflix, Inc. (NASDAQ:NFLX)

Netflix, Inc.Netflix, Inc. (NASDAQ:NFLX) is the largest movie subscription service in the world.  In its early days, Netflix started as a DVD-by-mail service, sending discs directly to customer’s homes along with postage-paid return envelopes.  This concept revolutionized the movie-rental business, and started the slow, steady demise of physical rental stores such as Blockbuster.

Over the years, Netflix has evolved into primarily an internet streaming TV and movie service, and has grown tremendously.  As of the end of 2012, Netflix had over 33 million streaming subscribers all over the world.  Since first turning a profit in 2003, the company has grown its revenue from about $270 million to almost $4 billion. As a result, those investors with the foresight to invest in the 2002 IPO at $15 per share have been handsomely rewarded.

Valuation and Growth

Netflix, Inc. (NASDAQ:NFLX) is still projected to grow rapidly in the coming years, with revenue expected to reach almost $5 billion in 2014.  The company’s growth is expected to come primarily from its aggressive international expansion of its streaming video services, which it sees reaching over 50 million subscribers by the end of next year.  Netflix’s current efforts are focused on such markets as the U.K., Canada, and Latin America.

The turnoff to some prospective investors is the company’s high valuation.  Netflix had a bad year, earnings-wise in 2012 with just $0.29 per share; down from $4.26 in 2011 (this was a primary reason for the poor performance in early-mid 2012).  For this reason, a TTM P/E multiple is not very relevant.

The consensus calls for Netflix, Inc. (NASDAQ:NFLX) to earn $1.34 per share this year, growing to $2.93 and $5.42 in 2014 and 2015, respectively.  So, shares currently trade for about 130 times forward earnings, which sounds astronomically high, but if all goes as planned (and this is a big “if”), earnings are expected to more than quadruple over the next few years.  Valuation of 31 times 2015’s earnings sounds a lot better, given the high growth rate.

Buy These Instead?

As far as stand-alone streaming video companies go, Netflix is in a class by itself.  The primary threat to Netflix, Inc. (NASDAQ:NFLX), that is, the biggest reason people would choose not to subscribe, are video-on-demand services that are offered by satellite and cable providers.  Should investors consider either of these instead?

On the satellite side, the leading provider is DIRECTV (NASDAQ:DTV) with about 32 million total subscribers.  DirecTV recently upgraded their on-demand service, which was one of my biggest complaints about their service.  Their on-demand video used to work like a DVR; that is, you had to download the video you want before viewing it.  As an investment, I don’t like DirecTV, as I feel that they will lose some business to the new TV services by AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ).  Additionally, the two-year contracts required by DIRECTV (NASDAQ:DTV) are a turn off to would-be new subscribers, as these long-term agreements are not required by the cable companies, who are generally cheaper as well.

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