Foolish Forecast: Netflix in the Mail

Motley Fool Stock Advisor pick Netflix (Nasdaq: NFLX  ) has more than doubled over the past year. That's a great start, but Fools tuning in to the company's earnings call at 5 p.m. tomorrow will be listening for clues to the company's future, not its past.

Wall Street Wisdom:

• General consensus. Twelve analysts follow Netflix, holding views all across the board. Seven say "buy," three counsel holding, and two actually cry "sell."
• Revenues. Revenue growth in the fourth quarter of 2005 is thought to have been nothing short of astounding -- up 35% to $194.6 million.
• Earnings. Not so with earnings, however. Analysts believe Netflix only grew earnings by a penny a share, to $0.15. (Then again, the analysts have been wrong before. In each of the past quarters, they've lowballed Netflix's profits numbers, missing the mark by an average of 83%.)

Margin watch:
Reviewing the company's recent performance, we see a pronounced trend toward lower gross margins, both sequentially and year over year. Operating margins also appear to be weakening, even as its revenues swell, but Netflix had been doing a decent job of maintaining its net margin until last quarter. Let's hope that tomorrow's news shows the company is back on track.

Margins	6/04	9/04	12/04	3/05	6/05	9/05
Gross	32.5%	34.2%	34.2%	32.6%	32.0%	30.7%
Op.	4.2%	7.3%	7.1%	5.8%	5.5%	3.2%
Net	0.7%	4.1%	4.3%	3.3%	3.5%	1.5%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Valuation metrics:
I won't mince words. By any traditional valuation method, Netflix looks grossly overpriced. The past 12 months have seen the company rack up just $2.7 million in free cash flow (which, for this company, I define as cash from operations minus capital expenditures minus cash spent expanding its DVD library). Its GAAP profits significantly overstate this amount, at $9.4 million. On a trailing basis, Netflix therefore trades at triple-digit multiples to both profits and free cash flow. Acrophobes, be warned.

Competitors:
Current rivals include Blockbuster (NYSE: BBI  ) , Movie Gallery (Nasdaq: MOVI  ) , and HastingsEntertainment (Nasdaq: HAST  ) . And as always, fellow Motley Fool Stock Advisor pick Amazon.com (Nasdaq: AMZN  ) lurks just over the horizon.

Netflix and Amazon are Stock Advisor picks. For a 30-day free trial, click here.

Fool contributor Rich Smith does not own shares of any company named above.