Is Netflix, Inc. (NFLX) Stock a Good Buy?

Amazon is actually unprofitable on a trailing basis, but by an incredible coincidence analyst consensus is for it to earn $3.18 per share next year- essentially even with the EPS forecast for Netflix, Inc. (NASDAQ:NFLX). Amazon is valued at a premium to Netflix, at a forward earnings multiple of 94, and we are skeptical of bullish assertions that the company will soon be able to cut costs in its retail unit and rake in massive profits. It too seems like a risky growth stock.

Another peer for Netflix is Outerwall Inc (NASDAQ:OUTR), formerly known as Coinstar, which is the owner of movie rental kiosk company Redbox. At a forward earnings multiple of only 11, Outerwall at least appears stunningly cheap compared to Netflix and Amazon. Of course, it is at something of a disadvantage in the market as it is dependent on physical inventory (which considerably limits growth prospects) and customers traveling to a physical location. Partly as a consequence of this, the Redbox unit has been seeing flat sales and lower operating income going by recent reports. The rest of its business is delivering low to negative profits.

Outerwall does not need high earnings growth, but it does need to hit analyst targets for next year which reflect an expected increase in earnings per share. Investors should be skeptical that the company’s fortunes will reverse and so that stock should be avoided for now. As has been suggested, buying Netflix or Amazon is risky in a different way: certainly these companies will continue their high revenue growth, but analysts are setting a high bar with their forward earnings projections and even if these two businesses perform in line with forecasts they will still require high earnings growth for several years after that to justify their current valuation. As a result investors should feel free to use these companies’ services, but opt out of owning the stock.

Disclosure: I own no shares of any stocks mentioned in this article.