September 13, 2011 | In: Technology

How Much Is Netflix Worth As a Company

I have written before about Netflix, thinking the stock was way overvalued at $132 a share. Of course, whoever reads the article now will laugh, since the stock is now trading at $210!

Do I still stick to what I’ve said before? Absolutely, I think now that NFLX is a dangerous stock, that may pop any day now, regardless what all the analysts are saying. Why do I still think this way? Well, Netflix is very close to market saturation, and its P/E is as high as 53. Not to mention, of course, that competition will soon (maybe very soon) creep in.

Let us examine some numbers: Just over a year ago, when I’ve written the first article about Netlfix, the stock was trading at $132 and its customer base was 15 million subscribers. Today’s customer base is up 10 millions subscribers, to as high as 25 millions subscribers, in the United States, Canada, and Latin America (according to Netflix). This means that there was a 67% increase in the customer base. How does that reflect in the stock? Well, let’s see, 132 x 1.67 = $220, which means that investors, at this current moment, value Netflix less than what they used to value it a year ago, not by much, but enough to say that investors no longer anticipate huge growth potential in Netflix

Imagine if Netflix cannot add as many customers next year as it did this year, what will happen? Investors will definitely believe that Netflix has reached a point where it can no longer maintain the growth, and a point where its only aim is to maintain its current customers, maybe through better deals and reduced pricing, which, in its turn will reduce the profitability of the company, which in its turn reduce the price of the stock.

Now let’s think about Netlflix as a business model, will their business model survive in 10 years, 20 years, 53 years? I doubt it that the business model will survive in 10 years, with all the breakthroughs especially in the entertainment industry, and I’m confident that Netflix will cease to exist (at least in its current form) 20 years from now. So why is the market valuing it at a P/E ration of 53? No idea. Regardless of how many subscribers Netflix can add next year (or quarter), the company will not impress investors. Competition will be very fierce in that area, especially from Google (a company that wants to diversify its products) and Apple.

But how much is Netflix really worth as a company?

I don’t know for sure, but I would trade such a stock at a P/E of only 10 (the future is not as bright as the present for Netflix), which means that each stock should trade, in my opinion, at around $40. And since Netlfix has 52.54 million shares, this means that Netflix, as a company, is worth $2.10 billion, and nothing more. The $9 billion extra on its market cap are just pure hype, and you will see them quickly vanish the moment Netflix misses an estimate.

Will I short Netflix? Never, but I will never trade it either.

4 Responses to How Much Is Netflix Worth As a Company

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Is Amazon Overvalued? « Fadi El-Eter

September 14th, 2011 at 3:31 pm

[...] overvalued by almost 90%. But hey, how cares? Amazon is nearly identical to Netflix (a company that is worth much less than what it’s currently priced at) when it comes to being overvalued. I wonder which one [...]

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What Are the Hottest Stocks in 2011? « Fadi El-Eter

October 12th, 2011 at 4:06 pm

[...] Netflix keeps on treating its customers as if they were cash cows) about this stock, but then, as I predicted, the stock crashed, and I think the stock will keep crashing (with some short rebounds) until it [...]

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Will Netflix Go Bankrupt? « Fadi El-Eter

October 26th, 2011 at 3:06 pm

[...] have warned against Netlfix many times before. In my last post about Netflix, I have evaluated Netflix as a company, and I deduced that Netflix is worth around only $2.1 billion, or $40/share. While I stand by these [...]

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Investment Strategies for 2012 « Fadi El-Eter

December 6th, 2011 at 6:12 pm

[...] Stay away from companies that don’t care about their customers: A perfect example in this situation is Netflix. These people increased their prices (for no reason other than they felt they can get away with it). Look at their stock right now. It’s less than 25% of what it used to be in July 2011. I have warned many times about Netflix and I have said that the real value of NFLX is $40. [...]

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