Netflix's soaring valuation raises some doubts on Wall St

Thu Apr 16, 2015 4:37pm EDT
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By Tenzin Pema and Devika Krishna Kumar

(Reuters) - Netflix Inc has been a stock market darling over the past few years and strong first-quarter subscriber additions sent its shares to another record high on Thursday. But is the company's sky-high valuation sustainable?

Some Wall Street analysts played devil's advocate, raising doubts about the sustainability of the video streaming service's scorching growth.

"I think if Netflix shares are valued based on its fundamentals, the share price is not warranted," Wedbush analyst Michael Pachter said.

Netflix's shares jumped as much as 20 percent to $568.75 - their highest ever. The stock, which has risen nine-fold in the last three years, was valued at 123 times forward earnings as of its Wednesday's close of $475.46.

In comparison, Apple Inc, the world's most valuable technology company, has a P/E ratio of 17, while Google Inc's stock trades at 26.7 times earnings.

Netflix's Wednesday closing implies a forward 5-year earnings growth of 35.1 percent.

According to StarMine's intrinsic valuation model, which takes analysts' estimates over five years and models a long-term growth trajectory, the stock should be trading at $77.09 with a 5-year profit growth of just 10.7 percent.

Still, at least 22 brokerages raised their price targets on the stock by $25-$500, with FBR Capital Markets analysts more than doubling theirs to $900.   Continued...

The Netflix logo is shown in this illustration photograph in Encinitas, California October 14, 2014.  REUTERS/Mike Blake