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Shares of Netflix (NFLX) are down nearly 17.4% over the past month as the stock has fallen from over $247 a share to $204. The stock has been a home run over the past year rising from just under $70 dollars per share. Analysts are incredibly bullish on the online chain as the stock as received several buy ratings upgrades. One extremely optimistic analyst has even placed a $270 price target on the company’s shares. But does the stock deserve this premium valuation?

The pro’s for Netflix are incredible. The company has over 20 million subscribers and has had record growth over the past five years. 50% annual growth rates are impressive for any company. Netflix has been an early investor in the streaming video market as the company has made shrewd investments hoping to avoid becoming the next Blockbuster (OTC:BLOAQ).

Last quarter’s earnings results were solid. Revenue was up 34% to $596 million and EPS was up 23% to 87 cents. Earnings are projected at $4.33 for the current year.

I would not however invest in Netflix for the following reasons:

  • Time Warner (TWX) is going to start renting movies through Facebook. Other movie studios will likely seek to digitally distribute their own movies in the future. More movie studios can seek to either rent their own content or look for other providers outside of Facebook.

  • Goldman Sachs for one sees Facebook as a serious threat to Netflix. Facebook has over 50 million daily users and could make a huge dent in the company’s subscription base if the company chose to delve completely into full time rentals.

  • Netflix is severely overvalued. A stock trading at 44 times earnings, 37 times book value and 5 times sales is not a bargain by any means. Even if Netflix can maintain a 25 to 30% growth rate going forward, the stock is still not cheap.

  • Blockbuster and RedBox are wild cards as both companies will likely move to digital distribution as well. A leaner less debt ridden Blockbuster could be a major force in the industry if the company does reemerge from bankruptcy.

One of the key tenets of value stock investing is not to overpay for a company’s shares. Netflix is a good stock to trade right now but not a good long term buy at it’s current price. It’s just too expensive a stock to buy on a fundamental basis right now.

Disclosure: None

Source: Do Netflix Shares Deserve a $270 Valuation?