Netflix's High Stock Price Is Indefensible

(TheStreet) -- Netflix NFLX, the best-performing S&P 500 stock over the past 12 months, recently eclipsed St. Joe JOE to become the market's most contentious stock. Having more than tripled in the past year, Netflix has drawn criticism from value investors and been pitched as a short candidate by hedge fund manager Whitney Tilson, founder of T2 Partners, who believes the stock is overvalued. His short bet, so far, has been a loser. Yet, Tilson's thesis is fundamentally sound. Netflix is approaching monetary hurdles, ranging from contract renegotiation to a transition to Web-based streaming content. Tilson isn't alone, either. Many media executives are baffled by Netflix's stock performance, including Jeffrey Bewkes, CEO of Time Warner, who quipped to the New York Times regarding the market's optimism for Netflix: "It's a little bit like, is the Albanian army going to take over the world? I don't think so." Netflix CEO Reed Hastings has responded to Whitney Tilson's vocal criticism that the market has overvalued Netflix by citing the company's expanding customer base. This is a tenuous defense. As is often the case, the timing, not the respective arguments, are critical to determining the ultimate winner of this bout. And the timing is less about when streaming will eclipse the mail-DVD business (it already is) and more about when the market will price in impending competition, rather than an expanding customer base. Netflix's stock is, by all measures, exorbitant. It trades at a trailing earnings multiple of 74, a forward earnings multiple of 35, a book value multiple of 40, a sales multiple of 5.3 and a cash flow multiple of 42, outsized premiums to Internet commerce industry averages. Its PEG ratio, a measure used to account for analysts' growth projections, at 1.6, indicates that the stock is 60% overvalued based on researchers' prediction of Netflix's terminal growth rate. Continue reading the article.