While Netflix (NASDAQ:NFLX) was able to announce strong numbers at its last earnings report, with increasing competition from Amazon (NASDAQ:AMZN) Prime, Google (NASDAQ:GOOG) through YouTube, and now Yahoo! (NASDAQ:YHOO) with screen, the run in the stock price is significantly overdone. Netflix shares have run significantly over the course of the last year to levels that are hard to justify. The stock's valuation is astronomically high, and while the subscriber base is growing, increasing competition make the long-term outlook less clear.
I would not own shares of Netflix here, largely on valuation - with a P/E approaching 400, the stock could take years to "grow" into its valuation. Additionally, if you consider the stock's earnings at current prices relative to where they were the last time the stock traded here, current earnings are roughly 25% of what they were last time. A correction is needed to bring valuations back in line with reality.
The largest potential risk to the trade, although shares could push higher in the very near term, is that Netflix finds a way to become more integrated with critical content providers. If the company were able to ink a few major content deals that would bolster subscriptions, the stock could run longer than expected. Ultimately, I do not see this as likely, as the company's cash position is dwarfed by rivals like Amazon.
In the video below, I discuss various reasons why I would not hold shares at these levels and where I see the stock going in the near term.