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1 Reason Not to Jump Into Netflix Today

U.S stocks are higher on Tuesday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.44% and 0.6%, respectively, at 10:30 a.m. EDT. Stocks put in a very respectable performance during the first half of 2014, with the S&P 500 rising 6.1% over the first six months ended on Monday. However, in an unexpected development, long-dated Treasury bonds notched up a roughly a 13% return and surpassed stocks, With the 10-year Treasury yield just above 2.5%, the only thing investors can now expect from bonds is for the principal to hold its value relative to inflation (and that is assuming you hold the bonds to maturity). Carefully chosen stocks are the best game in town if you wish to achieve an actual return. Speaking of which, Goldman Sachs is giving one high-profile secular growth stock, Netflix (NASDAQ: NFLX  ) , a boost this morning. Do the Masters of the Universe at the bank have this story right?

Shares of Netflix are up 5.3% in morning trading, in the wake of the Goldman upgrade from neutral to buy and price target spike of a whopping 55% to $590. Goldman said Netflix will "drive sustained outperformance," as "subscriber growth will continue to exceed expectations." It also forecast that the streaming-video provider's addressable audience will double as it continues to add new markets.

Netflix is expected to move into France and Germany in the second half of this year; the company has said it expects its international operations to become profitable this year and that international revenue will eventually exceed that from the U.S. Indeed, although Netflix already operates in 41 countries, it derives only a quarter of its revenue internationally. Growth and operating leverage in the international unit could ultimately provide a very substantial profit boost once Netflix begins to raise its prices.

I think the stock market tends to overvalue short-term growth and undervalue long-term earnings power and market position, and Netflix scores very highly on the latter two. However, with the company at 65 times the earnings-per-share estimate for 2015, it's tough for this value investor to get tremendously excited about Netflix shares. Outstanding company, yes -- I'm a happy, loyal customer myself – but the stock looks a bit rich to earn the same adulation.

My judgment could be tainted by a value investor's skepticism, of course, and I could ultimately be caught flatfooted in this situation, as the company's long-term growth overwhelms the impact of any excess in the valuation. Either way, investors should only buy shares in Netflix with a long-term holding period in mind if they expect to properly capitalize on this secular growth story. Don't jump into the stock for a trade just because it's rising on the back of an analyst upgrade -- that's a losing proposition.

Beyond Netflix: Cable companies are scared, but you can get rich from this $2.2 trillion market
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 


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Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

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9/3/2015 4:35 PM
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Netflix CAPS Rating: ***