Netflix is now at an all time high (at $132), some people are going to lose some very serious money on this stock. I’ve traded this stock before and thankfully I got out of it. The stock is up 140% for this year alone, and this is too good to be true for a stock that was downgraded by 3 different institutions since May, but again, the term “Buy the rumor, sell the truth” prevails, and no one really cares about the company as long as the general sentiment on NFLX is bullish.

Here’s why I think the stock is way over valued and the correction that happened in July was not sufficient (where the stock went down to the 90s). Investors, in general, are valuing the stock on what the company will become, if it can sustain its growth rate, and not what it currently is. They’re also assuming that Netflix will never ever have any real competitors (after the death of Blockbuster). Hmmm…

Now this is my opinion: Netflix currently has around 15 million subscribers in the US charging them about $9/month. 15 million = 5% of the total US population, which means that they have a penetration rate of 5%, quite high for a service that not everyone needs. Penetration rate is a term used in mobile operators, and some of the best mobile operators in the world have a penetration rate of 10%, but of course, they have competition. But unlike a Netflix subscription, a mobile is a necessity in this day and age; watching a movie is not.

Let’s also filter those numbers better, if Netflix has 15 million subscribers, then, it’s logical to assume that those subscribers represent households (I don’t think the father, the mother, the daughter, and the son will each have their own Netflix subscription). The average US household size is 2.59. So the 15 million subscribers represent 15,000,000 x 2.59 = 38,850,000, which means that the real penetration rate of Netflix is around 13% of the total US population. Wow! That is very impressive, that’s bigger than most of the biggest mobile companies out there.

Now one might ask, why am I comparing Netflix to mobile companies? First of all, they’re both Services, they both depend on subscriber growth as well as some artistic ways to get more money from their subscribers (e.g. offering new services), and it’s very hard for both of them to increase their prices without raising eyebrows and without increasing their churn rate. A very important common characteristic also is that both of them are extremely sensitive to what happens with their competitor, but Netflix is so far blessed that the only competitor, Blockbuster, is now on the Pink sheet, where the loss of 4 cents means shedding 25% of the value of the stock.

Blockbuster may be dead, but it’s not hard at all to create a company that mimics Netflix. It only needs some cash. Netflix is not Microsoft, it is not offering a product, it is just offering a service that anyone/anywhere can replicate.

In my opinion, the real price of Netflix should be at most $70 less than what it is at the moment (which is $132), but then again, investors think that the US population will double in 2011, and if that doesn’t happen, they think Netflix can reach a penetration rate of 30% next year, meaning one in every 3 households will have a Netflix subscription. Not to mention, of course, that they think the serious amount of cash that Netflix is generating will not light a bulb in an investor’s head somewhere who will very easily mimic their business model and creates some serious competition. And finally, investors apparently feel that the economy is very healthy for a service stock depending directly on household income to grow exponentially. The whole recession thing is a crock anyway…

Get out of this stock, it’s way overvalued!