Can anything stop Netlfix stock?March 26, 2013: 12:22 PM ET
How's this for a House of Cards? Netflix (NFLX) is the best-performing stock in the S&P 500 so far this year. Shares have more than doubled as investors have once again become optimistic about the company's growth prospects.
Netflix rose nearly 5% Tuesday after Pacific Crest analyst Andy Hargreaves boosted his price target on the stock to $225. That's up from his earlier forecast of $160 and is nearly 20% higher than the stock's current price.
But while Netflix has won back many investors who felt burned after a series of disasters in 2011, some traders on StockTwits are still skeptical about the company's future.
At a bare minimum, there are reasons to wonder if analysts are too late to upgrade the stock given it's huge run. There are also questions about Netflix's valuation.
To be fair (and also sarcastic), that 600+ P/E for Netflix is based on trailing earnings, not projections. It's not nearly as frothy if you use estimates for this year and next.
Of course, I am being glib. Shares of Netflix are still exorbitantly rich, trading at nearly 140 times 2013 earnings estimates and more than 60 times 2014 forecasts. So Apple (AAPL), by way of comparison, is a steal.
But in case you forgot what can happen to even a cheaper momentum stock, Apple should remind you. Shares plunged as many institutional investors decided to bail. One trader predicted that could happen to Netflix sometime soon.
Well, time is running out on that call. The quarter pretty much ends on Thursday since markets are closed Friday. But I agree that at some point, hedge funds could fall out of love with Netflix just as they did with Apple.
Still, not everyone is a Netflix bear. Some say that you can't really look at the valuation since the company is still looking and acting more like a start-up than mature company.
A valid point. It's the same argument people use to defend the extremely high valuation of Amazon.com (AMZN). And Amazon has defied the skeptics for a long time now.
Netflix is clearly a leader in online video. Rumors that Hulu may be for sale is further proof of that.
The company also has made big bets to develop its own content, such as the Kevin Spacey show "House of Cards" and the resurrection of the former Fox cult sitcom favorite "Arrested Development." Netflix is not a bad company. The issue is whether the stock should be trading in such rarefied air -- especially since there still is a decent amount of competition in the market regardless of what happens to Hulu.
There's also the fact that many short sellers are betting against Netflix. And while that may sound like a reason for the stock to go down, Netflix can also run up sharply on the faintest whiff of good news (like an analyst boosting his price target) since all those people who borrowed stock and sold it with the hopes of returning it at a higher price are forced to quickly cover their position in order to avoid huge losses. It's called a short squeeze.
Agreed that it's dangerous to bet against heavily shorted stocks. But I'm not sure that banking on short squeezes is a good reason to buy either. The shorts are circling Netflix with good reason. The valuation is insane and the company has had a history of disappointing investors and subscribers.
Or has everyone already forgotten the Qwikster debacle and big price hike for customers back in 2011?