Netflix in 2014: Sinking ship or highflier?January 2, 2014: 1:27 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
Netflix was the King of the World in 2013 ... although you're out of luck if you want to watch the movie that made that line famous on Netflix in 2014.
Shares of Netflix (NFLX) surged nearly 300% last year, making the stock the "Top Gun" (another movie you no longer can stream on Netflix) in the S&P 500.
So what will Netflix do for an encore in 2014? Will it continue to soar like Tom Cruise's Maverick? Or is the stock another Titanic in the making?
It seems highly unlikely that Netflix will repeat its epic 2013 run this year. If it did, Netflix's market value would balloon from its current level of about $21.5 billion to around $86 billion.
That would definitely put Netflix's valuation, which is already extremely high, firmly in the Danger Zone. It would Take My Breath Away. (Does "Top Gun" have the greatest movie soundtrack ever ... or cheesiest?)
At $86 billion, Netflix would be worth 16.5 times the company's estimated 2014 revenue of $5.2 billion. And it would value Netflix at nearly 380 times projected 2014 earnings per share. That's ridiculous.
Not even Amazon (AMZN), the other online giant with valuations that cause altitude sickness, is trading at multiples that high.
Even Netflix CEO Reed Hastings has started to caution investors about the stock's price.
Now of course, my calculations assume that estimates for Netflix's earnings don't change. And that's highly unlikely as well.
Consider this. At the end of 2012, analysts were expecting Netflix to earn 42 cents a share during 2013, according to FactSet Research. Wall Street is now forecasting a profit of $1.80 a share.
Analysts also had a 2014 earnings per share estimate of just $1.36 a share at the close of 2012. They now expect Netflix to report earnings of $3.89 a share.
If Netflix hits that $3.89 target, it would be an earnings increase of 116% from what analysts are forecasting for 2013.
Fundamentals move stocks over the long haul. So the dramatic move in Netflix's shares last year shouldn't be all that surprising when you look at how well the company did and the fact that analysts had to keep raising their estimates to keep up with the company's performance.
So just because Netflix went up by 300% last year does not mean it is doomed to plunge this year. Yes, Netflix may be overvalued. But it hasn't gotten to this point just on hope and hype.
Netflix has proven the skeptics (which occasionally included me) wrong. Its business model works. This isn't a Missouri show-me stock like Twitter (TWTR) -- which has soared since last year's initial public offering despite a lack of profits.
Netflix's sales and earnings are growing because it had more than 38 million streaming customers paying monthly subscription fees worldwide as of the end of the third quarter of 2013. That's up 25% from 30.6 million at the start of last year.
So all the fears that people would sign up to binge watch shows like Netflix originals "House of Cards," "Orange is the New Black" and "Arrested Development" -- as well as cable hits like "Breaking Bad" -- and then cancel their subscriptions have proven to be for naught.
People really like Netflix. They stick with it. And that makes sense. The value proposition is great. You don't need to be a math genius to calculate that $7.99 a month for unlimited streaming is a LOT cheaper than the cost of the most bare-bones basic cable or satellite TV plans.
Again, I am not predicting that Netflix will have another year like 2013. It's probably not going to be one of the hottest stocks for a second year in a row. But could it keep climbing? Definitely. Would it be a huge shock if shares went up another 15% to 20%? That too seems reasonable when you look past this year.
While most of us are still just getting used to the fact that the calendar now reads 2014, it won't be long before investors start to look ahead to what Netflix may do in 2015.
And so far, Wall Street is predicting another banner year. Analysts expect sales to rise more than 16% from 2014 and that earnings per share will soar nearly 80%.
But here's the thing. Analysts are still largely bearish on the stock. The consensus price target for Netflix is $338.56, according to FactSet. That is nearly 10% below the current price.
There's an obvious disconnect here. Wall Street thinks the stock is going to fall but also believes that earnings will continue to surge. One of those assumptions is probably incorrect.
My guess is that analysts are wrong about their price targets. If Netflix keeps posting strong gains in subscribers, sales and earnings, the stock should go up ... just not by another 300%.