I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Netflix (Nasdaq: NFLX). Is the DVD rental king cum on demand movie maven the real thing? Let's get to the numbers.

Foolish facts



CAPS stars (5 max)


Total ratings


Percent bulls


Percent bears


Bullish pitches

1,240 out of 1,642

Highest rated peers

dELiA*s, Acorn International, PetMed Express

Data current as of Sept. 29.

Netflix is the sort of stock that attracts as many detractors as opponents, but in CAPS, the mood is waxing bearish. Fools believe that the stock, which has more than tripled in the past year, has run too far, too fast. They think it's due for a fall.

"I shorted this at $111 and watched it go into the low $90s, and then watched it shoot up again. I bought it back at $124 and it's been straight up since then," wrote All-Star investor CubsBearsBulls43 yesterday. "Now at 70x earnings and 50x book value. I hate to fight the trend and stand in front of this freight train but I think it's time to short again. My guess is that you see some selling after their quarterly results are announced in October, regardless of a good or bad report."

Short Netflix? I'm not so sure. Yes, the valuation may very well be rich, but we're also talking about the leader of an undisputed revolution in digital media. Stocks like that tend to operate outside the lines.

The elements of growth


Last 12 Months



Normalized net income growth




Revenue growth




Gross margin




Receivables growth

Not applicable

Not applicable

Not applicable

Shares outstanding

52.4 million

53.4 million

58.9 million

Source: Capital IQ, a division of Standard & Poor's.

There's lot to like in Netflix's numbers. Let's review:

  • I'm most impressed by the revenue line, but it's worth noting that normalized net income has grown faster than revenue in each of the past three years.
  • Gross margins have also improved each year, suggesting operating leverage in the underlying business. Perhaps a consequence of delivering more video over the web? It's too early to know for sure, but viewers are increasingly using Netflix's Watch Instantly service.
  • Finally, management's controversial stock buyback program has proven shrewd. But we also shouldn't be too surprised; CEO Reed Hastings and his team have a history of producing very high returns on capital.

Competitor and peer checkup


Normalized Net Income Growth (3 yrs.)

Amazon (Nasdaq: AMZN)


Apple (Nasdaq: AAPL)


Coinstar (Nasdaq: CSTR)


Comcast (Nasdaq: CMCSA)




Dish Network (Nasdaq: DISH)




Source: Capital IQ, a division of Standard & Poor's. Data current as of Sept. 29.

This table doesn't tell us much. All the major digital media players are growing rapidly, and Netflix isn't even the fastest of the bunch. Even Coinstar, owner of the Redbox DVD rental service, is growing at a brisker pace.

Grade: Sustainable
But I'm not sure it matters. As my Foolish colleague Anders Bylund writes here, there's a transition to online video under way, and Netflix is leading the conversion with Watch Instantly and buy-direct deals with studios. I'm sticking with my outperform call on Netflix in CAPS.

Now it's your turn to weigh in. Do you like Netflix at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

For further Foolishness featuring Netflix:

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Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of IBM and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Apple and is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.