Internet media company Netflix Inc. (NFLX, Financial) has investors and analysts flummoxed over its typically overvalued, expensive stock, but its rally continues unabated. Shares have almost doubled in the last 12 months, with an over 50% rise since April 2015.
The Los Gatos, California-based company is a television network transmitted over the Internet wherein users can play, pause and resume content. It boasts 44 million members across 40 countries.
RBC Capital reportedly, raised its target price for Netflix from $600 to $700 last Friday. Shares reacted accordingly during early trading hours to soar 0.04% to $623.25, but fell an overall 0.18% to close at $621.87. The shares trade at a massive P/E ratio of 161.95, which is comparatively much higher against S&P 500’s maximum P/E of 17. The stock has forward price-to-sales ratio of 5:1, which means that investors prefer 1% Netflix shares over 5% of its total sales over the next year.
Overseas expansion plans
CEO Reed Hastings is confident of Netflix’s proposed global expansion plan according to which the company seeks to enter 200 countries by the end of 2016. Netflix shares have been climbing since news of this expansion broke earlier this year. China, the second-largest economy in the world with over 1 billion consumers, and an online video market worth $5.9 billion and growing poses a unique challenge and opportunity for Netflix.
The American media company seems to have figured out the trick to crack the market though, as it has reportedly partnered with Jack Ma’s Wasu Media to gain a foothold in the Communist country. Last week, the market reacted positively to news of Netflix partnering with the man behind e-commerce giant Alibaba Group (BABA, Financial), who purchased 20% stake in Wasu for $1.05 billion.
The deal presents the possibility that America’s leading video streamer would have an easier way in than that faced by Google Inc. (GOOG, Financial) and Facebook Inc. (FB, Financial), over the strict licensing and content censoring laws in the country. In November 2014, TimeWarner’s (TWX, Financial) HBO partnered with Tencent Holdings (TCEHY, Financial) to stream its popular TV shows in China.
Demand for American brands and content in China is strong and growing. Box office revenue at the country surpassed that of the U.S., last month, at $650 million. China has twice the number of broadband subscribers than the U.S. does. And this million-dollar market is waiting to be tapped.
Shares pop and sputter
Analysts predict a decrease in earnings of 58.05% this year over last year. But forecasts peg earnings growth at 118.51% next year over this years forecasted earnings, according to Zacks Investment Research. Fifteen of 29 analysts polled, by Zacks Investment Research, gave the stock a "Strong Buy" rating.
"We rate Netflix Inc. shares a HOLD. The primary factors that have impacted our rating are mixed, some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, expanding profit margins and notable return on equity. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income, generally higher debt management risk and premium valuation,” declare the team at The Street, giving Netflix a ratings score of C+.
