Netflix Inc. (Nasdaq: NFLX) stock is up more than 300% over the past year, making it a surprise leader in the technology sector and a media darling. And while it may be overvalued, it should continue to perform well throughout the year.
I've long respected Netflix's business model. In fact, I've been a customer for several years now. However, the company's stock has suddenly become very controversial, as many analysts and fund managers think it overpriced and overhyped.
That case is certainly there to be made, considering Netflix has a Price/Earnings (P/E) ratio of about 72.5 – compared to 19 for Apple Inc. (Nasdaq: AAPL).
But here's the deal: Netflix reported a blow-out fourth quarter after the market closed last Wednesday.
The company's net income clocked in at 87 cents a share – beating the consensus estimate of 71 cents a share – on revenue of $596 million. Subscriber count at the end of December was 20.01 million, which compared to guidance of 19.55 million. Gross additional subscribers in the period were 5.65 million, compared to a consensus estimate of 4.82 million.
Guidance was also positive, as managers said they expect the fiscal first quarter to close with up to 23.7 million subscribers. That includes 21.9 million to 22.8 million domestic subscribers and 750,000 to 900,000 foreign subscribers, which shows you the overseas opportunity that still lies ahead.
More details showed that margins would improve as more subscribers move to the online streaming model, which means the company does not have to send DVDs in the mail.
Incidentally, that's great for our thesis on the opportunity ahead for network load-balancing equipment makers like F5 Networks Inc. (Nasdaq: FFIV).
"More than one-third of new subscribers are signing up for the pure streaming plan, and we expect that percentage to grow over time," the company said in a letter to shareholders. "Very few of our existing subscribers are downgrading to the pure streaming plan."
And on buybacks, management said: "Our strategy over recent years has been to use excess cash to buy back stock. We took a break from that in Q4 to reassess our cash needs and the buyback strategy, but plan to return to buying back stock in Q1."
Shares rose 16% to hit $218 on Friday, as investors liked what they heard. But more importantly a lot of short-sellers are going to be forced to buy the stock to cover their wrong-way positions. They squawked about the metrics – a Wedbush analyst recently reiterated his $80 target for the stock – but they were squeezed without mercy.
Of course NFLX is overvalued, and of course it will eventually come down out of its parabolic run – but that's not yet where we are in the cycle. So get your popcorn ready, and expect standing corrections followed by sharp advances to be a running theme for the rest of the year.
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