Netflix Crash Just a Matter of Time
I made the call in last week's article, The Anti-Apple: Netflix to $300 by Summer . Since first telling investors to prepare to buy NFLX, the stock has soared 194%; it's up 74% since I first predicted $300.
My Netflix take just illustrates this market's senselessness.
I know it sounds crazy. I write about how much I love the Netflix service. How much better it is now than in 2011. I called the move to $100. Called the move past $100. And now I am forecasting a retest of the stock's all-time highs. Meanwhile, Apple (AAPL) crashes with dim light at the end of the pipeline.
It's nonsense, no question about it. I'm with you. As I've said before, valuation means nothing in this market, nor should it.
Just as I have no problem with Amazon.com's (AMZN) 3,400 P/E ratio, I cast no pebbles at NFLX's lofty 585. As I explained prior to Apple's earnings , P/E no longer works as a valuation metric. Better to use it to gauge investor confidence.
This new and more relevant way of using the P/E ratio doesn't exonerate investors from doing hard work and struggling with the seemingly irrational -- NFLX up, AAPL down, Amazon's P/E, among other examples.
AMZN gets the benefit of the doubt because Jeff Bezos has executed strategically for more than a decade. AAPL no longer receives the same pass because, simply put, Steve Jobs is dead. Investors have higher levels of confidence in Bezos's ability to follow through than they do Tim Cook's. I don't completely agree with that, though I do see where it's coming from. What matters is that the collective mindset is out there.
We had pretty much the same scenario with NFLX in 2011 as we have now. Everybody loves it.
The business appears to be humming. TheStreet's Jim Cramer hits the nail on the head ; Netflix is everywhere. You buy a television set, it's there. Buy a streaming player, it's there. Heck, Netflix often has its own button on the accompanying remote control.
Netflix achieved this level of saturation -- and continues to scale onto consumer electronic devices and such -- because people love the service. If you make hardware, there's real value in making sure Netflix receives primary placement on your television or streaming device. Consumers want and expect to see it.
I like the service so much I would pay up to $20 a month for it .
But Netflix's business model faces a predicament yet to be solved. Sooner or later, Reed Hastings will have no choice but to do another 180 and raise prices . He cannot keep taking on debt amid plummeting free cash flow forever. Theoretically, he could, but, even in this irrational market, it's not a sustainable practice.