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Tesla, Facebook, Netflix

|Includes: FB, NFLX, Tesla, Inc. (TSLA)

Three companies run by three geniuses valued at nosebleed valuations.

For value investors, when is a P/E ratio of 100x attractive? When the market expects revenue to grow 200%, but your research leads you to believe revenue will grow 250%. So is this the case for Tesla (NASDAQ:TSLA), Facebook (NASDAQ:FB), and Netflix (NASDAQ:NFLX)?

  TTM P/E Expected YoY EPS Growth
Tesla -100.7x 158.62%
Facebook 118.9x 34.94%
Netflix 303.3x 128.98%

As you can tell from the chart above, expectations are high for the three companies. My goal in this blog is to critique the long-term sustainability of each companies' competitive advantage and test whether or not such high valuations are justified.


EPS is expected to grow 158.62% YoY, materially higher than the industry average of 17.21%. Are Musk and Tesla able to not only grow EPS YoY but sustain growth rates to justify such a high valuation? In the short-term, yes, in the long-term, I don't think so, and here is why:

For Tesla's valuation to be justified, using the industry average 12.07x P/E, Tesla would have to grow EPS to a PV amount of 10.52 per share. The auto industry is one of the most competitive industries in our business world. Tesla's business strategy of introducing a high-end vehicle to generate the "want", followed by introducing an affordable vehicle; thus, making it tangible for regular folks to own one, seems like a great strategy, but I don't believe it will prevail in the long-run. Auto-manufacturers such as Ford, Toyota, Honda, and GM probably don't view Tesla as a legitimate competitor in the status quo given their different customer targets. Once Tesla releases an affordable sedan, subsequently gaining market share amongst middle class consumers, a retaliation amongst the auto-manufacturers will ensue. Telsa will benefit the auto-industry by driving innovation, but it will not benefit Tesla.


Is social media in the midst of a bubble? Google and Facebook's ~$3bn offer to buy Snapchat, a company with no assets and earnings, reminds me of similar activities transpiring throughout 1999-2000. So is Facebook overvalued? I think so. As more and more social media companies pop up -LinkedIn, Twitter, Tumblr- in conjunction with the ever expanding technological world, the supply of advertising outlets increases. As the userbase for other social media companies (and the amount of social media companies) increases, simple economics tells us the rates at which Facebook charges for advertising will inevitably decrease. Facebook's sole competitive advantage from the advertisers' standpoint is its astronomical amount of users (1.19bn as of September 2013). As other social media companies acquire more and more users, Facebook's competitive advantage will deteriorate as any premium the company is able to charge for advertising begins to diminish.


How can Netflix grow EPS at 128.98%? Simple, continue to gain subscribers. As a Netflix user myself, I enjoy its sheer simplicity and navigation. As a Amazon Prime user (as a college student and avid reader, I purchase lots of books), I cannot stand its navigation on all my consoles (I own a xBox 360, PS3, and Wii) and PC. The ease of navigation is the sole reason I continue to subscribe to Netflix. I will cancel my Netflix account once Amazon improves its user-frame as its both cheaper (~$70/year vs ~96/year) and the video content is relatively identical.

So Netflix recently surpassed 30 million subscribers, yet hasn't surpassed its breakeven point. So in-order for Netflix to generate FCF and ultimately be profitable, the Company needs to attract more new users. As a means to achieve their strategic goals, the company is heavily allocating capital towards advertising and exclusive content. While their exclusive content is fairly decent, it's not an x-factor that will make me, and most likely other users, commit to Netflix in the long-term (assuming Amazon Prime improves). Netflix also looks to expand beyond the US, which could be a problem given the amount of piracy prevalent in other nations.

Ultimately, Netflix will be the victim of diminishing marginal returns. Its user base will be threatened by Amazon Prime allocating more capital towards advertising and becoming more user friendly.

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