Simple Reason Why NFLX (and other tech stocks) are extremely overvalued

by coloradoclimber878

Imagine the scenario in which Netflix reached the point it could not grow anymore, and simply decided to return all earnings to shareholders in the form of a dividend. As a studious investor, you know that you could comfortably purchase a 10 year treasury and receive 2.95% per year.

Since the treasury is essentially risk free (in terms of getting your principal back as well as interest payments) then you would certainly expect to be able to earn more buying shares of NFLX.

So in this hypothetical example, you expect to earn at minimum $29.50 a year for a $1,000 investment (2.95% current 10 year treasury rate). At current prices of $390/share that means NFLX would need to have earnings per share of at least $11.50.

At this rate a $1,000 investment in NFLX would give you 2.56 shares which if all earnings returned would be equal to $29.50 (2.56*11.50).

Thus the question I have is how the hell does Netflix grow its earnings to $11.50/share? That would be the minimum amount to justify a return equivalent to a 10 year treasury. Given the inherent risk, the current share price implies that Netflix should be able to achieve earnings that well surpass $11.50/share.

Current EPS Projection for 2018 is $2.88, 2019 is $4.69, 2020 is $6.83, 2021 is $10.12.

This same modeling technique can be applied to other tech stocks and result in the same conclusion. It literally feels that this is all momentum buying and the moment one of these companies misses an earnings forecast there will be a major momentum shift and these valuations will come crumbling down.

Would anybody like to give a reasonable argument with real financials on why they feel the current price is justified without using generic qualitative statements like (everybody uses it, they have serious subscriber growth, they’re the new cable etc…)?

 

If you look at the details operating expenses line up with subscriber growth. To date, incremental revenue growth has NOT gone into operating profits. How many more subscribers do they need for this to happen? If it hasn’t happened by 125 Million, why would I believe it will ever happen?

2017 expenses 7.6B/118M subs = $64/sub
2016 expenses 6.0B/93M subs = $64/sub
2015 expenses 4.5B/75M subs = $60/sub
2014 expenses 3.7B/57M subs = $65/sub

So $11.50 a share * 434M shares implies profits of around 5B a year.
Their current revenue is 12B a year. They currently spend between 7 and 8 billion dollars on content, 3B on general expenses.

So can you please explain to me how you generate 5B in profit from these numbers? The only logical way is through international expansion. Seems like a major uphill battle, and I just don’t see it. There’s only going to be more and more competition. I would be surprised if they ever see more than 200M subscribers, and at some point people will tire of watching what seems to be more and more limited offerings.

I think growth will plateau way before you realize at which point the stock will plummet out of the stratosphere.

 

 

Disclaimer: Consult your financial professional before making any investment decision.

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