Netflix Shares: Have They Reached a Peak?

Feb.22.11 | About: Netflix, Inc. (NFLX)
It appears the easy money has been made in Netflix (NASDAQ:NFLX). There are many reasons why the risk reward ratio is not favorable for longs at about $240 per share. It is possible a blow off, speculative top was recently reached, when shares hit an all time record high at $247.55 on February 14, 2011.
First of all, the markets in general are overbought and Netflix shares even more so. The shares are trading far above the 200 day moving average at about $152.56 and the 50 day moving average of about $197.57. Insiders are cashing in, with repeated selling of their Netflix shares. Multiple insiders have already sold millions of dollars worth of stock in 2011. There was over $100 million worth of insider selling in 2010 alone. Another recent event is that Whitney Tilson capitulated, covering his Netflix short position. That may turn out to be another sign that these shares have reached a major top. Read more about this here.

With earnings estimates at about $4.39 for 2011 and about $6.25 for 2012, the PE ratio is at levels that would require very substantial continued growth rates, and near perfect execution from management. At this PE ratio, any earnings miss or disappointing guidance could lead to a major meltdown in the share price. It seems that people are buying these shares just because they seem to keep going up. People were doing the same thing with real estate a couple years ago, and we all know how that ended. The run up in these shares could continue for a while longer, but when the music stops, (and I am sure it will) things could get ugly fast.
I have Netflix myself and have used it often, but I have found it harder and harder to find movies I want to rent. After about two years of membership, I have already seen most of the movies I have wanted to see. This could lead me to reducing my movie rental plan, or canceling it someday. I would be interested if others here are feeling the same way.
Many credit the growth for the past couple years to the fact that consumers joined Netflix en masse as a way to have cheap entertainment at home. But as the economy improves, it could reduce this trend as consumers decide they can afford to go out more often.
It has been dangerous to short Netflix for the past couple of years, but based the extremely high valuations, a market that is also overbought, and the other reasons stated above, I think the shares have reached a level where the risks of being long are now possibly equally dangerous.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.