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Netflix is still way overvalued

January 8, 2013: 1:32 PM ET
You can watch videos on Netflix on your iPhone ... just like many other online video services. With competition remaining fierce, it's hard to justify Netflix's valuation.

You can watch videos from Netflix on your iPhone ... just like many other streaming video services. With competition remaining fierce, it's hard to justify Netflix's valuation.

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 investors have a reason to be in a good mood: Shares of the online video company were trading over $100 Tuesday morning. They haven't closed above the century mark since last April.

The stock is already up nearly 10% this year and has surged more than 50% in just the past three months. Bulls would point out, though, that the stock is still well below its highs from the summer of 2011. So can Netflix (NFLX) keep rallying?

It's going to take more than press releases about new content deals (or Facebook status updates about how many hours of video were viewed ) for that to happen.

Yes, Netflix is arguably in a better position now than it was a few months ago. It struck a deal last month to stream movies from Walt Disney (DIS), and announced on Monday that it would get the rights to eight television shows from Warner Bros. CNNMoney parent Time Warner (TWX) also owns Warner Bros.

Turmoil at rival Hulu -- a streaming video service owned by big media firms Disney, News Corp. (NWSA) and Comcast (CMCSA) -- could help Netflix as well. On Friday, Hulu CEO Jason Kilar announced he would be leaving the company. That may put the future of the nearly six-year-old Hulu into question.

Related: The beginning of the end for Hulu?

Still, investors should be wary when considering Netflix right now.

The biggest concern has to be Netflix's valuation. Shares trade for nearly 250 times 2013 earnings estimates. That's even more expensive than Amazon (AMZN), which also sports a triple-digit earnings multiple. And let's make no mistake: Netflix CEO Reed Hastings hasn't had as successful a long-term track record as Amazon's Jeff Bezos.

Sure, you could argue that Netflix, like Amazon, is spending heavily on investments. So the P/E ratio based on 2013 earnings estimates is artificially high because of Netflix's international expansion costs, money spent to ink new content deals with big media companies (deals that are likely to be more favorable for the media companies, by the way), and plans to develop its own content. Netflix now has several of its shows in the works, including the much-anticipated fourth season of former Fox sitcom "Arrested Development."

But even if you take a pass on 2013 and look ahead to next year, Netflix is no bargain. Shares trade for more than 70 times 2014 earnings forecasts.

As for the content deals themselves, investors need to take a closer look before getting too excited. The Disney movie deal includes some classics from the House of Mouse, such as "Dumbo." But Netflix won't stream new theatrical releases from Disney, as well as Disney-owned studios Pixar and Marvel, until 2016.

Related: Netflix doubles CEO Hastings' pay

The Warner Bros. deal looks even less exciting. The biggest current hit show of the bunch is NBC's "Revolution." The deal also includes "666 Park Avenue" -- an ABC drama that's already been canceled -- the yet-to-be released "The Following" from Fox, and "Political Animals," a USA Network miniseries that ran for six episodes and won't be renewed.

Some might think that the Warner Bros. deal is at least psychologically significant, because Time Warner CEO Jeff Bewkes has been critical of Netflix in the past. He infamously joked in a late 2010 interview in The New York Times that the chances of Netflix revolutionizing the media sector would be like "the Albanian army ... going to take over the world."

But the Warner Bros. deal is hardly a Nixon/China detente moment. On Sunday, Time Warner-owned HBO announced an extension of an exclusive deal with Universal Pictures to keep that studio's movies coming to HBO first -- and away from Netflix -- well into the next decade. That is more significant, especially since HBO is building its own premium HBO GO online and mobile subscription service.

Related: Amazon: TV is about to get way more interesting

Meanwhile, Amazon has been busy inking deals that could make its Prime Instant Video service even more competitive. Last week, Amazon struck a deal with A&E. That gives Amazon customers the rights to watch shows from A&E, The History Channel and Lifetime.

Last September, in a big blow to Netflix, Amazon announced a new deal with cable network Epix, a channel owned by Viacom (VIAB) that has notable movies from Viacom's Paramount, MGM and Lionsgate (LGF). That deal followed closely on the heels of the expiration of Netflix's exclusive deal with Epix. Netflix still has Epix movies.

Amazon also announced an expanded licensing agreement with NBCUniversal last summer. That deal looks incredibly prescient, given NBC's ratings resurgence this season.

Related: Why Netflix got into hot water with the SEC

At the end of the day, Netflix is trading as if it's the undisputed leader in the streaming video industry -- but all the recent deals by the likes of HBO and Amazon show just how fragmented the market is. I didn't even mention the battle Netflix faces from the likes of Apple (AAPL), as well as Verizon (VZ), which is partnering with Coinstar (CSTR) on a Redbox streaming service.

Don't get me wrong: Netflix -- and Hastings in particular -- deserve a lot of credit for resurrecting the company's reputation after some disastrous mistakes in 2011, most notably the huge price hike for subscribers who wanted DVDs and streaming and the short-lived plan to rebrand the DVD service as Qwikster. Netflix was arguably undervalued when it fell to a low of under $53 a share last summer.

Still, Netflix looks equally frothy now that it's back at $100. Another reason Netflix has rallied is that some investors think corporate raider Carl Icahn, who took a 10% stake in Netflix last year, is pushing Hastings to sell the firm. That's unlikely to happen. Netflix dug in its heels and adopted a so-called poison pill: a shareholder rights plan to make it tougher for outsiders to buy a big chunk of the stock.

To be fair, Icahn can't be too upset right now. Shares are up more than 40% since he disclosed his investment last October. But what happens if Icahn walks away? There were rumors of that making the rounds Monday. That could be the end of takeover talk ... and of this recent rally.

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