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.