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Netflix (NASDAQ:NFLX) is a leading Internet television network providing services to more than 33 million members in 40 countries. Its viewers enjoy more than one billion hours of TV shows and movies per month, including original series. Netflix charges a monthly fee for its services and members can watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen.

Netflix stock has been nothing short of a rollercoaster ride for investors as the stock has had countless ups and downs. Two years ago, the stock reached $300, but a new pricing plan caused the members to leave Netflix - as a result, stock price came crashing down. However, after an impressive fourth quarter, the stock is again up 92% since the start of the year.

Is Netflix Really Expensive?

At the first look, Netflix price multiples will look extremely weak. However, price multiples can be hugely misleading in some cases. Especially, if the focus of the company is on expansion and growth; price multiples might paint an ugly picture. Since growing companies often sacrifice short-term profitability for long-term growth of the company; it is possible for a growing company to have extremely high price multiples. Price multiples alone can be a poor way to evaluate these investments.

At the moment, Netflix has an awfully high P/E ratio (625), and the forward P/E ratio of 43 is also not something to hold your breath for. However, I believe Netflix should not be valued based on current P/E or earnings one year from now - a longer perspective should be taken while valuing Netflix. A better metric to value Netflix will be the growth in its subscriber base. In a short period of time, the company has been able to grow its subscriber base substantially, adding 1.8 million new subscribers from outside the U.S. and over 2 million inside the country.

Furthermore, I believe there is massive growth opportunity available for the company outside of the U.S., which I will discuss later in the article. It is clear that investors are currently paying a premium to hold Netflix shares, because they see obvious growth potential available for the company.

Growth Opportunity

The company is currently focusing on expansion in geographic regions as well as product range. The company has been growing its subscriber base rapidly inside the U.S. as well as abroad. In about two years, Netflix has amassed over 6 million subscribers outside of the U.S. Growth in the international market is a key driver for the company. The number of Internet users is increasing rapidly all around the world along with an increase in bandwidth.

Most of the areas of Asia and Europe are largely untapped, and provide a lucrative opportunity for the company. Bandwidth will play a vital role in expanding Netflix's services to these shores, and looking at the current speeds offered in these parts of the world; it is clear that the company will not have trouble streaming its products in these countries.

Competition

Competition is slowly rising for Netflix in the market. As a result, the company is facing a slow decline in growth in its streaming business inside the U.S., which makes its geographic expansion all the more important. Amazon (NASDAQ:AMZN), Comcast (NASDAQ:CMCSA), Verizon (NYSE:VZ) and Time Warner (NYSE:TWX) are some of the biggest competitors for the company. Amazon is considerably behind Netflix at the moment; however, the company is trying to catch up. Netflix also competes with the traditional cable TV providers. Currently, almost all of the competitors are considerably behind Netflix, and are playing catch up.

However, in the long term, these companies can pose substantial threat to the business. As a result, Netflix will have to be robust in its services and packages. Netflix might not be able to charge premium pricing for its services if the competition comes down to the prices. The company will have to build and maintain the best library in order to maintain its competitive advantage and charge premium pricing.

Conclusion

Most of the growth stories end up paying substantial rewards to patient investors. Netflix is growing at an exceptional rate, and I do not expect the growth to slow down in the near future. Increase in competition will slowly impact the growth of the company. However, currently, the market is far from saturation. There are wide geographical as well as product areas that can be exploited to achieve massive growth. As a result, I believe Netflix will keep growing in the near future, and stock price will also follow an upward trend.

Source: Netflix: Potential Future Growth Makes It A Buy