After back-to-back days of hitting all-time highs, shares of Netflix (NASDAQ: NFLX ) opened below the previous high-water mark established two summers ago.
A pair of analysts -- Morgan Stanley's Scott Devitt and BTIG's Richard Greenfield -- thinks that it may be time to take profits. They lowered their ratings on the leading video service provider today. Neither is necessarily concerned about the model or Netflix's prospects. It's primarily a valuation call, and it's hard to blame them. Netflix shares have soared 439% over the past year through yesterday's close.
Has Netflix grown that fast? Of course not. Revenue has only grown 20% over the past year, fueled by a 36% spike in streaming subscribers that's been offset by a decline in folks paying more for disc-based plans.
Naturally, this doesn't mean that Netflix shares should have risen just 20% over the past year. That starting point came at a time when things looked bleak for the company. It's a whole new world now. This year has treated Netflix to Emmy nominations across three of its original shows. A year ago, it seemed as if Netflix was vulnerable to competition from Amazon.com (NASDAQ: AMZN ) and whoever would buy Hulu, but there's no one visible in its rearview mirror these days. Netflix has 37.6 million streaming customers, and no one is likely to get close.
There are also some pretty spectacular things happening at Netflix as we work our way down the financial statements. Revenue may have climbed just 20% in its latest quarter, but earnings per share more than quadrupled. Margins are improving dramatically as the model scales. Losses overseas are narrowing, and the contribution profit of its domestic streaming business has climbed 74% -- or nearly three times the 26% top-line advance.
Earnings are expected to more than quadruple this year and then more than double to $3.33 a share come 2014. Of course, this doesn't make Netflix cheap at more than 90 times next year's earnings. It's no bargain at 45 times 2015 times projected earnings and 36 times 2016's profit target.
However, fat forward multiples don't tell the whole story here. Just as investors have forgiven Amazon's lack of near-term profitability, the market understands what Netflix is doing. It's building a moat that's far larger than skeptics have given the company credit for.
"Your margin is my opportunity" is a great line attributed to Amazon CEO Jeff Bezos, and that's what Netflix has been doing as it pays up for content and takes hits overseas while it grows its truly global business.
Yes, global. The Netherlands became Netflix's latest new market this week.
Now, this also doesn't mean that the sky's the limit. There's a reason why the longtime and correct bulls at BTIG and Morgan Stanley have positioned themselves to neutral ratings on the hot stock. We may never see it fall back into the double digits absent a stock split, but it wouldn't be a surprise to see a sharp correction given how difficult it is to pin a fair value on Netflix itself these days.
No one -- not even Netflix -- knows the ultimate addressable market for its service. No one knows how much folks will be willing to pay. Yes, even Netflix doesn't know as it has refused to budge from its flat $7.99-a-month rate to test its pricing elasticity.
All of this makes the call to take profits or to hold on a lot grayer than most stocks with more predictable paths and likely scenarios. See, as far as Netflix shares have gone, it also wouldn't be a shock to see a tech giant, wireless carrier, or even cable provider gobble it up. Investors who are uneasy after seeing Netflix become such a larger part of their portfolio over the past year can't be blamed for unloading at least part of their stakes, but that's all the more reason to also keep at least some shares around so they don't kick themselves if the stock continues to move higher.
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