What’s the Outlook for NFLX Stock?
Investors and consumers look at Netflix, Inc. (NASDAQ:NFLX) in completely different ways. There is a gaping chasm between “Netflix the service” and NFLX stock.
On the one hand, Netflix has proven irresistible to consumers. Millions have flocked to the video streaming service, hungry for content that can be played anytime, anywhere. And starting at $7.99 a month, it seems like an absolute bargain.
By contrast, many investors are starting to think NFLX stock is too expensive. Even after slipping 22% since the start of January, Netflix shares are still 30% above where they were a year ago. Moreover, the price is a whopping 328 times the company’s earnings!
Critics say it’s impossible that Netflix could ever justify such an extravagant valuation. In fact, their arguments remind me of similar claims made about another fast-growing Internet company. I’m talking about Amazon.com, Inc., of course.
Amazon and Netflix have plenty in common, though most important is the fact that they both prize service over profits. Let me explain…
Netflix and Amazon May Never Pay Dividends
Benjamin Graham, a legendary investor who showed Warren Buffett the ropes, once said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
What he meant is that if you’re trying to guess at the short-term outlook for a stock, try and gauge its popularity among investors. But if you want to know which company can keep delivering growth for its shareholders long-term, go with the company that makes the best product.
That’s exactly the vision behind Amazon. CEO Jeff Bezos has made that pretty clear in the past:
“We don’t celebrate a 10% increase in the stock price like we celebrate excellent customer experience,” said Bezos. “Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the interests of customers and shareholders align.” (Source: “Amazon.com Letter to Shareholders,” Securities & Exchange Commission, April 2013.)
This is the mentality that made Amazon such a success. It’s also the reason why Amazon trades at hundreds of times its earnings (if it has any to begin with). The company is rarely in the black, which drives bearish investors crazy.
They don’t understand why the price doesn’t simply crater. But it’s really quite simple. People are going to keep buying things on Amazon.com and the company will continually use that cash to expand even further. It’s a growth machine.
Netflix is of the same ilk.
So what if NFLX stock is more then 328X earnings? It didn’t stop the company from expanding into 130 countries this year, nor did it prevent it from financing original content. And it most certainly didn’t stop subscribers from loving those shows, which convinces me that Netflix stock is going to keep growing, regardless of its bottom line.
Growth is all that mattered to Amazon, and it’s all that will matter to Netflix, too.