To every thing there is a season, and a time to every purpose under heaven:
A time to get, and a time to lose;
A time to keep, and a time to cast away;
A time to love, and a time to hate;
A time of war, and a time of peace.
-- Ecclesiastes 3:1, ascribed to King Solomon, circa 950 B.C.

In his bearish take on Netflix (Nasdaq: NFLX), Matt Koppenheffer does a yeoman's job of showing how the stock's price-to-earnings ratio seems more fit for inducing nosebleeds than for attracting value investors. OK, so Netflix is expensive when you're looking at back-of-the-envelope valuation ratios.

That's fine as a starting point for further research, but it's hardly damning evidence against owning the stock.

For one thing, P/E compression does hurt, but not as badly as Matt would have you believe. That six-stock basket of high-flyers anno 2006 actually beat the market since then, with an aggregate return of 59%, or 9.7% a year (see Matt's basket of stocks). That includes the infamous Market Meltdown of 2008, and several of Matt's punching bags were on a downward earnings trend in 2006. Five of the six trounced the S&P 500 benchmark, with only CA Technologies (NYSE: CA) lagging behind.

For another, Netflix doesn't manage its operations to maximize earnings at the moment -- or at any time since the company started. There is a season to everything, and earnings growth will come -- but until then, Netflix will invest nearly every available dollar in growing its business.

Linux vendor Red Hat (NYSE: RHT) is doing exactly the same thing, as CEO Jim Whitehurst explains:

I measure it by revenue growth, but you know, we have sort of reached a negotiated settlement with Wall Street. In general, analysts like to see margin improvement, so we've committed to 100 basis points of operating margin improvement a year, and then we invest the rest in the business. So that's exactly what we do.

Looking at the hockey-stick subscriber chart, I'd say its efforts just started paying off. The stock may look as though it is following suit, but it's actually trailing behind the exponential growth of current and future revenues. The only reason Netflix is growing earnings at all is because Wall Street expects it to; when the domestic and international subscriber lists approach their terminal growth rates -- maybe in five years, more likely in 10 -- you'll see a dramatic strategy shift as Netflix turns its earnings and cash-generation powers to supernova intensity.

Value investing isn't always about low P/E ratios; a famous adherent by the name of Warren Buffett (you might have heard of him) changed the field by seeking out strong management and a sustainable business advantage to unlock the true value of a business. Although not all value investors would touch Netflix, it’s hard to deny that the company has both of those valuable traits in spades.

Keeping your hands off of Netflix because it looks expensive today is a mistake. Buying on drops is a fine idea, but you might never get the chance to grab Netflix this cheaply again.

Explore this Foolish Duel over Netflix:

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