Netflix CEO warns against investor "euphoria"
(MoneyWatch) It's not often a CEO tells investors he's worried about the company's stock price going up, but that's just what Netflix (NFLX) boss Reed Hastings did yesterday.
Hastings was trying to tamp down what he called investor "euphoria" following the Internet video company's blockbuster earnings. For the quarter ending in September, Netflix earned $32 million, or 52 cents per share. That's more than four times the $7.7 million earnings, or 13 cents per share, reported a year ago. The company also said it added 1.3 million U.S. subscribers in the third quarter and that it expects to end the year with between 32.7 million and 33.5 million users, which would put it ahead of cable heavyweight HBO.
"In calendar-year 2003 we were the highest performing stock on Nasdaq," Hastings wrote in a letter to investors published with Netflix's latest earnings report. "We had solid results compounded by momentum-investor-fueled euphoria. Some of the euphoria today feels like 2003."
Hastings also pointed out that this irrational exuberance among investors is often followed by a nasty hangover. "Despite the huge swings in our stock price since our 2002 IPO ($8 to $3 to $39 to $8 to $300 to $55 to $330), we've continued to grow our membership every year fairly steadily. We do our best to ignore the volatility in our stock."
At least some investors appear to have picked up on Hastings's cautionary tone. Prior to the earnings announcement, Netflix shares closed at $354.99. It spiked in overnight trading and opened this morning at $387.84 before falling slightly to $359 at mid-day. This marks a huge turnaround for Hastings and Netflix, the biggest gainer in the Standard & Poor's 500 index this year: A year ago the company was trading at $69.
At that time, Hastings was being called one of the worst CEO's in the business following a decision to split Netflix into two companies, one which would send movies by mail and another which would deliver them over the Internet. That move was hugely unpopular with subscribers, and Hastings was forced to reverse course almost immediately.
For today, at least, he doesn't have to worry about being called nasty names in business media.
Hastings's caution is justified. At its current stock price, Netflix trades is at an eye-popping 226 times its projected earnings for the next year. To put that in perspective, Apple (AAPL) shares currently trade at about 13 times earnings, and the S&P 500 as a whole is at about 14.5 times future earnings.
Is Netflix's stock price a bubble? Analysts are split on that question. In a note to investors, Evercore analyst Alan Gould wrote, "We do not see any evidence that the rate will slow down in the near-term." He also raised his price target on Netflix shares to $350, from $150.
But Bank of America Merrill Lynch analysts, who also expect Netflix to continue growing, express doubt that it can grow quickly enough to justify its current stock price. "With Netflix stock at $400 in the aftermarket, we find the valuation difficult to justify."
For Netflix to merit a market valuation that rich, the company would need at least 140 million subscribers, including 70 million in the U.S. and 70 million overseas, the analysts added. Netflix would also need to hike its prices by at least $3 a month per user and to greatly expand its profit margins.