Netflix Hits All-Time High: a Bubble, or Just the Beginning?

Jacob Harper |

Netflix Inc. (NFLX) is one of the biggest stories on the stock market this year, rising meteorically to become 2013’s second best performing stock in the S&P 500 behind only Best Buy Inc. (BBY) . A unique marketing strategy, coupled with an original programming slate culled from Big Data analysis, has helped the company more than overcome the aborted “Qwikster” DVD spinoff snafu that sent the stock reeling in 2011.

On Sept 9 the streaming video company scored another major hit when they announced the completion of a deal with British conglomerate Virgin Media that will integrate Netflix into a play-TV platform. The move is an industry first, and could signal the beginning of a new era of expansion for Netflix as traditional cable and internet streaming continue their march towards an inevitable partnership.  

Netlfix has defied critics in 2013 with their ability to sustain major gains and innovate as the market for internet streaming seems to saturate. While their last quarterly earnings report showed they merely met expectations, Netflix is making smart long-term moves to extend their longevity and growth. The nascent online studio has sunk significant money into original programming, which serves two functions.



One, it attracts new subscribers to the existing service. And two, original programming serves is a wholly owned feature of Netflix’s content. By vertically integrating their content model, Netflix doesn’t have to share revenue generated from that content, increasing their margins even further.

The company is not without skeptics however, who instead of seeing a revolution in content delivery just see another bubble, and claim the company has yet to prove how it will react to impending fierce competition in internet streaming. There are other worrying aspects concerning Netflix’s stock. The company trades at a P/E ratio of a whopping 367.69. Furthermore, the company retains a consensus price target of $233 a share, over 20 percent lower than their current valuation.

Some notable analytical firms especially bearish on Netflix are Jeffries Group, who hold a price target of $160 for the stock, and Wedbush Securities, who reiterated an “Underperform” on the stock in July while putting a $80 price target on the stock, or roughly 30 percent of their current value.

However, despite these reservations, and the stock’s seemingly unsustainably fast rise north of $300 a share (it dropped as low as $65 a share following the Qwikster debacle) some analysts are getting even more bullish. On Sept 3 Mark Mahaney of RBC Capital raised his price target to $330 from $280. The same day, Scott Devin of Morgan Stanley raised his target from $270 to $314, saying he expects Netflix to greatly increase subscribers by 2017.

Netflix was up 5.2 percent on the day to hit $309.46 a share, its all-time high since it IPOed in May 2002 at $15 a share.

 

(image of Netflix HQ courtesy of Wikimedia Commons)

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
BBY Best Buy Co. Inc. 46.15 0.59 1.30 6,698,494
NFLX Netflix Inc. 143.41 0.16 0.11 3,907,377
HOCFF Hochtief AG 144.25 0.00 0.00 0

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