Very few companies will be more pleased about 2013 than Netflix (NASDAQ:NFLX). Was it not less than two years ago that it was in a downward spiral? Netflix is currently up 400% since last year and has a market capitalization of 14.79 billion. Concerns about international operations and DVD subscribers abound, but the company is forging ahead. Recent attempts to increase its subscriber base have resulted in net additions of 630,000, compared with 528,000 a year ago.
Of course, Netflix's revenue was $1.07 billion in the second quarter, up 20% from the same period a year ago. The company announced net earnings of $29 million, a five-fold increase from the same period in 2012. And its EPS of 0.80 makes it attractive to potential investors. Netflix added 2.7 million subscribers so far this year, up from 2.5 million at the same time last year.
Hedge Fund managers
Netflix is not one of the most popular tech companies among hedge fund managers this year. But we acknowledge that some hedge fund managers have recognized its potential. The number of managers invested in the stock this quarter is 65, compared with 50 this time last year. Icahn Capital, managed by Carl Icahn, holds over 5 millions shares in the stock. Other bullish managers include Daniel Benton, Stanford Colen and Josh Resnick.
Considering the company's macroeconomic environment, its future appears bright. Gartner, a research firm, said sales of tablets and smartphones reached 821 million units for 2012. It predicted an increase of close to 50 percent for 2013, with a forecast of 1.2 billion units to be sold. The influx of smart devices makes it easy for audiences to consume streaming contents when, where and how they want it. Netflix benefited from the increased sales of tablets and smartphones in the last quarter.
However, Netflix trades at 76 times forward earning estimates, hence it needs innovative strategies to increase its earnings. Additionally, the company looks expensive with an enterprise value equal to 310 times trailing revenue, compared with 40.00 for the sector and 169.5 for the industry. Its debt equity is also 45.22, above the industry average of 45.1. With a beta of 1.75, the company appears risky in comparison with its competitors. With a return on equity of 5.32%, it is lower than 19.14 for the sector.
Netflix is best compared to Amazon (NASDAQ:AMZN), which has a video streaming service that competes with Netflix, and to Outerwall (NASDAQ:OUTR). Granted, Amazon trades higher than Netflix at 105 times forward earnings estimates, but at 0.64, it has lower beta than Netflix. Though its earnings per share loss of $0.02 did not satisfy analysts, it has a debt/equity of 34.83, compared with 45.22 for Netflix. Its EPS growth in the next five years at 36.33% is higher than Netflix at 22.50%. Outerwall carries a cheaper forward P/E of 10.16 than Netflix. At 0.98, it is also less risky. With an EPS of 4.30, Outerwall is more attractive than its competitor. At 5.86, its EPS estimate for next year is higher than 3.30 for Netflix. Outerwall's earnings went up 27% year-on-year. It also reported a revenue of $554.2 million, a 4.1% increase year-on-year. We are looking forward to considering Outerwall more closely after its next earnings report.
Netflix can also be compared to Dish Network (NASDAQ:DISH) and DIRECTV (DTV). Both of these companies are struggling with profitability, but the case is not pressing. Dish increased its revenues by 0.01% in the last quarter, but it had a net loss of $11 million, compared with a net loss of $226 million the same time a year ago. At a forward P/E of 22, it is far cheaper than Netflix and Amazon. With a beta of 0.59, it is less risky than Netflix. Dish is valued higher than Netflix with an EPS of 1.09 and a trailing P/E of just 41.35. With a return on equity of 360.32%, it is more attractive than Netflix (5.32%). DIRECTV has rebounded from its lows, and the stock is 21% up from a year ago. DIRECTV's net income suffered a 15% decline in the last quarter. However at a trailing PE of 12.89, Outerwall is the cheapest among the companies mentioned. The company is valued higher than Netflix with a forward P/E of 10.71 and an EPS of 4.80. At 5.78, its EPS estimate for next year is higher than 3.03 for Netflix. Its EPS growth in the next five years at 37.51% is higher than Netflix's.
Also, analysts have been issuing mixed ratings on the stock in the past few weeks. Cantor Fitzgerald lowered NFLX stock to Hold from Buy with a price target of $260. Pacific Crest downgraded the stock to Sector Perform. JPMorgan raised its price target to $290 from $254. Evercore raised the stock to $150 from $130. Heard Lazard suggested that investors should buy it over weakness.
We don't think Netflix is a buy yet. It has to grow its earnings, or it might end up overvalued at the present price. Though the company may grow its earnings in the near future, we are not certain its revenue-generating proposals will achieve the objective due to the competitive nature of the video streaming industry. We do not think investors should be impressed with these plans.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.