Netflix (NASDAQ:NFLX) is a good company. It has fantastic growth rates and has captured a large segment of the home entertainment and now the online streaming market. At its current valuation, however, it is difficult to see how investors will benefit from buying the company now, unless we are in for another technology stock bubble.
NFLX is in the DVD rental business. The company plans to buy content and start moving its customers onto the web to watch movies. In fact, NFLX claims that it grew subscribers by 53% over the past year. What Cramer nor NFLX cheerleaders seem to grasp is that NFLX gave out free trials of its streaming service to juice that growth rate. In real terms, the company is growing sales and earnings by around 30% -- suggesting that todays 70X Price to Earnings ratio is nearing speculative bubble territory.
The Achilles' heel of NFLX is competition from Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Coinstar (NASDAQ:CSTR) and even Carl Icahn, who is working to rekindle Blockbuster. While NFLX may be exciting and growing, so was Pets.com.
Let's do some big picture thinking: Netlfilx has a wide moat business in DVD by mail -- no one wants to be in that game against NFLX. However, NFLX is moving its customers into a low moat business -- Online Video, a business with almost zero barriers to entry.
Trouble is for NFLX investors, anyone with a website can imbed the same technology and play the same movies. If the studios are smart, they will simply start their own NFLX type of streaming service and completely cut out the middle man -- which is Netflix!
In essence, as a DVD by mail provider, NFLX had a viable function and a model that has solid defenses against competition.
Streaming, on the other hand, competes with Torrents that are free, Google, Apple, etc...
Most analysts are totally caught up in the technology stock space right now and this will likely end badly as it always has in the past.
Maybe paying 69X earnings for a company moving from a high moat business to a low moat business is prudent, but I would argue that NFLX is worth around $110 or so based on Financial Statements.
Clearly, the pumping of Cramer et al has driven this stock much higher. With millions of viewers, Cramer is always looking to take a position in a controversial stock to drive viewership.
However, with the economy in shambles and so many stocks trading for steep discounts to intrinsic value, why is it that Cramer constantly pitches the most over-owned stocks in the market?
I will leave the reader to be the judge, but clearly Cramer is not someone who pays attention to valuation, which is ultimately the driver of stock prices over the long term. Investors should pay attention to the man's recent track record before leaping to buy into one of his "sure thing" pump and dump investments.
It would be one thing for Cramer to do a 10 minute HARD SELL segment on NFLX at $60 or $40 or $90 or even at $100, but for the man to have been pitching ARNA or ISRG the whole time NFLX was rallying and now, SUDDENLY, pumping NFLX with all his might, investors should be skeptical of his motives.
Momentum players need stocks that can lead the next bubble. A stock like NFLX is so egregiously frothy that by pushing the stock higher, the momentum party can last a little longer as everyone sees the stock jump and wants to own ONLY the riskiest stocks in the martket as they are "going higher."
This is the same movie of bubbles and crashes over and over again. Jim Altucher is saying Gold is a bubble and recommending stocks at 80X earnings... Recently, he recommended that the FED buy stock futures! Talk about insanity. The only people helped by such a manipulative and illegal policy is Wall Street! 55% of Americans own no shares of stock. By creating new stock bubbles, the Cramers of the world are doing everyone in America a disservice.
- 1/21/01: “This is the lowest-risk, highest-reward environment possible.” And from 3/24/03: “…the risks of owning stocks are as high as I have ever seen them, and the rewards the least certain.” Gotta love Cramer!
- He loved CROX and ENER etc... almost as much as NFLX
Disclosure: Short NFLX