Netflix (NFLX) is a stock that quadrupled in value during 2013 returning nearly 300%. The word Netflix is all over social media and on optimists’ watchlists if they are not already buying stock.
Billionaire investor Carl Ichan made a reported $800 million from Netflix after he unloaded nearly three million shares in October.
I have a slight suspicion that my cursory valuation will show that Netflix is overvalued, not hard considering the rise of Netflix last year along with the rest of the market but I wanted to crunch some numbers anyway to see just how much people will be overpaying if they decide to take a position.
The table reproduced below gives me an opportunity to share with you many of the value metrics I use when reviewing a stock for the very first time.
Netflix Valuation Table
Annual figures derived from Morningstar and ADVFN
Why I Would Not Buy Neflix Today
Neflix is overvalued.
Just concentrating on a few of the metrics in the valuation section at the very end of the above table we see that Neflix has:
- A current PE ratio of 303
- Is trading at 575% of it’s five year average PE ratio
- Has a negative tangible book value (when goodwill is added of course book value is positive)
- Has a price to cash flow of 500
- Never paid a dividend
I’ve bought stocks that do not pay a dividend but I’ve never bought a stock trading at a PE ratio of 303 because I’d be breaking one of my own rules. Rules and sticking to them are at the heart of successful value investing.
How much would you be overpaying if you bought Netflix stock today?
This means that in order for Netflix to even be considered as growth stock investment (PE ratio of 20 or less) at current 5 year average earnings levels it would need to trade at $42 – $43.
That means you would be overpaying today by $321 and that’s if Netflix still continued to have the growth potential it has shown over the last 18 months which at these elevated prices is optimistic to say the least.
I don’t even buy growth stocks I buy stocks that are either:
That means because Netflix is a large cap stock having a market capitalisation of over $10 billion, it would need to be selling in the market at a PE ratio of 12 or less, in other words $25 per share or less.
Do you have an opinion on Netflix or the numbers in the valuation table above? Do you use these metrics to quickly value a stock?
Let me know in the comments.