Netflix Heading for $320/Share Despite Already Being Overvalued

| About: Netflix, Inc. (NFLX)

For many months now, Netflix (NASDAQ:NFLX) has been dogged by critics who have claimed that the stock is way overvalued (correct) and about to collapse (incorrect). Netflix is a classic example of an overpriced growth stock that can remain overvalued far longer than we value investors would think was possible.

Only the most delusional of Netflix's longs truly can believe the stock will be trading at significantly higher levels three to five years from now. As a Seeking Alpha article titled "Too Many Great Expectations" showed, even in a best of all worlds outcome where Netflix wins 25% of the world's households as customers, the company would still be overvalued at present price levels!

That said, the common mistake is to rush out and short a momentum stock after the latest egregious upward spike. People have been rushing to call the top in Netflix's shares ever since Whitney Tilson famously covered his intellectually correct but early -- and thus wrong -- short position in Netflix. Since then, a quick glance through the SA archives finds an overwhelmingly negative bias to the body of articles published about Netflix, with many boldly negative titles. Among these, we've seen Netflix: Setting Up For Disaster, published May 17, Is It Finally The End Of The Road For Netflix?, published June 19, and Netflix Nukes Itself, published July 12.

But despite all the negativity, the stock keeps brushing off the criticism as it continues to trade higher. Skeptical investors continue to make the same mistake I warned against in my February article, Netflix Bears: Right In Theory But Still Losing Money. In short, Netflix's bears are betting that the stock market will rapidly revalue Netflix by forcing it to trade on its fundamental value rather than the wild delusions dreams of its seemingly foolish -- but successful -- shareholders.

In my view, there's no reason to expect that a company that the market has mispriced for many quarters now will suddenly be forced back to trading, based on more realistic valuation metrics. As long as earnings continue to grow reasonably quickly, which they are, and top-line revenues continue spiking higher, the growth story that Netflix's owners are banking on will continue to look alive and well. As Netflix CEO Reed Hastings just told us, the company is looking forward to its first billion dollar revenue quarter.

This is the exact sort of blindingly obvious neon sign indicator that bulls will be able to point to as evidence that the growth story is alive and well. Forget about margin compression, increased competition from new sources such as Wal-Mart (NYSE:WMT) and other such distractions -- these problems can be deferred for quite awhile yet. Netflix has traded up to its current price level due to its consistent rapid growth. The growth (for now) is still on this trajectory, and with a 60% price increase coming up, revenue growth will experience a momentary spike even beyond the recent trend.

Netflix investors who bought the stock for its rapid-growth profile aren't selling yet. (It's worth noting that there are very few high-profile consistent growth names available presently; where would a hypergrowth-oriented investor turn if they sold their Netflix now?) With international expansion (though admittedly of a strategically dubious nature) set to pave the way for continued top-line increases in coming quarters, there is nothing to indicate that growth investors will lose their taste for overpriced Netflix shares just yet. The words I wrote in February still ring true today:

All these momentum names, led by Netflix, will eventually miss their earnings projection one quarter, lose their sheen of invincibility, and most likely drop 50% or more. But there's no need to rush your short entry. For today and the forseeable future, the short squeezes will continue as gamblers and momentum traders keep reaching for new 52-week highs.

And while I don't use technical analysis as a major basis of my investing outlook, the following chart is still extremely bullish.

[Click to enlarge]

Following last quarter's iffy but not downright bad results, the Netflix bears attempted to get a nice selloff going but were unable to close below the uptrend and failed to make a new lower low. With a higher low in place, and strong followthrough action on Wednesday -- rising while the market tanked -- the stage is set for Netflix to resume rallying and head onward and upward to a new 52-week high.

With such a large short position outstanding in the stocks, nervous bears will inevitably cover, setting off a short squeeze taking the stock to my short-term target of $320. While the market is wrongly valuing Netflix on a fundamental basis, in the short-run, the trend is your friend; with the company on track for its first billion dollar revenue quarter, its shares will likely trade higher.

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