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)
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.
Speaking of cable, let’s take a quick look at Comcast Corporation (NASDAQ:CMCSA) which is a favorite of mine because of the diversified nature of their business. Aside from their cable subscriber base of 22 million customers (largest in the U.S.), it also has acquired NBC Universal, which consists of cable networks such as CNBC and USA, broadcast network NBC, a major movie studio, and the Universal theme parks. Comcast Corporation (NASDAQ:CMCSA) is also attractively valued at 17 times forward earnings, considering that the company is expecting 15% annual earnings growth over the next several years.
Conclusion
While Netflix, Inc. (NASDAQ:NFLX) may appear a bit expensive, consider how small their current subscriber base is relative to its potential. Netflix is yet to target some of the more populous areas of the world, such as most of Europe and developing countries with growing middle classes like China and India. This is not to mention the trend toward smart TV’s right here in the U.S., which make integration with services like Netflix much easier.
Over time, who knows the true potential of streaming movies? Having said all of that, I would wait until after the company reports first quarter earnings on Monday the 22 before jumping in. If everything is going as well as expected, Netflix, Inc. (NASDAQ:NFLX) is probably a safe bet. On the other hand, if the earnings report is a little below expectations, you may get a chance to get in to this rapidly growing company at a discount. Wait and see…
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix
