Is Netflix Overvalued?

By Hoda Mehr Thu, Jan 21, 2021

Hey Scoopers,

Wednesday was a calm day for the market. — More on that in the “Overall Market” section.

Beyond the overall market, one streaming stock surprised investors, while an eCommerce stock took a breather. — More on that in the “What’s Up?” and “What’s Down?” sections.

Oh, by the way, is Netflix overvalued after Wednesday’s price jump? — More on that in the “Water Cooler” section.

But, first, here is a recap of what happened in the market yesterday:

Market Recap

• U.S. markets: All three indices ended the day in the green for the second day in a row. Scroll down to the “Overall Market” section to read more.
• Cryptocurrency: Bitcoin’s price fell below $36,000 per coin.

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A Rather Calm Day.

The transition of power to the Biden and Harris duo went well on Wednesday, and all three indices moved upward slowly and steadily throughout the day. It was a calm political day without any economic indicator reports. The market took a breather from volatility for at least one day.

Surprise Subscriber Growth

So, what happened?

Shares of Netflix (Ticker: NFLX) were up more than 16% on Wednesday. The company announced its latest quarterly earnings report, and to the surprise of most commentators out there, it managed to grow its global subscribers by 21.9% last quarter. That was enough to send the stock price soaring.

The question that keeps popping up is whether Netflix is worth investing in at the current price? Hold on to that question until we get to the Water Cooler section.

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Taking A Breather

So what happened?

Shares of Jumia Technologies (Ticker: JMIA) were down by more than 4%. If you are not familiar with this company, it is mostly known as the Amazon of Africa. Similar to Amazon, it brings online shopping and delivery to several African countries. Also, similar to PayPal or Alibaba, it provides mobile payment to African consumers. The stock has been growing rapidly from the low of a few dollars when it was shorted by some of the most well-known short-sellers such as Citron to more than $40 a share, with still a large percentage of its shares available for trading shorted. Today’s stock price fall is not due to any specific news. But when the stock price grows so rapidly in a matter of a year or so, a few percent up and down is not much of a surprise.

Is Netflix Overpriced?

So what happened?

Now, back to Netflix (Ticker: NFLX) and whether the stock is worth investing in at the current price? Netflix stock is priced quite aggressively. The company’s price to earnings ratio was 91 before today’s jump, which means with the current earnings, it would take Netflix 91 years to make enough money to justify its valuations.

But, the valuation may be justified. One fact that supports such a bold claim is what the management shared in the latest shareholder letter. Netflix management believes the company can now have consistent free cash flow generating operations and no longer needs to raise new capital even though it plans to produce one new original content per week. That means the long-lasting bear case against Netflix that was about the company being heavily in debt and needing to keep raising capital to continue to grow is no longer valid.

With that analysis, Netflix valuations may still be justified.

If you have any questions, or suggestions let us know by emailing us at members@tradestocks.com. We look forward to hearing from you.

About the Author

The authors of this Scoop are the editorial team at Stock Card, led by Hoda Mehr. Hoda Mehr is CEO and Co-founder of Stock Card and the host of Renegade Investors podcast. She runs a community of 40,000 stock market investors and manages Stock Card's successful flagship portfolio, Roll with Our CEO, on Stock Card Portfolio Store. Hoda is an Economist with an MBA from Concordia, John Molson School of Business. She applies behavioral economics, data journalism, and storytelling to all aspects of her work. Before starting Stock Card, Hoda worked as a strategy and insights lead at technology companies including Symantec, Aimia and Sony. Create a free account to do your stock market research easily and mistake-free: Stock Card Stock Card