Netflix (Nasdaq: NFLX) a Buy for Aggressive Investors

Stock Pick Long Idea

While not for the faint of heart, Netflix (Nasdaq: NFLX) shares look to me like a buy for aggressive capital. The company blew away fourth quarter EPS forecasts. Consensus estimates look too conservative, which have the effect of over-inflating the P/E and PEG ratios. Beware though that high growth and valuation bring with it sensitivity to news, and so any failing can be disastrous for capital.

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Netflix (Nasdaq: NFLX) a Buy for Aggressive Investors

Netflix (Nasdaq: NFLX) shares jumped 10% after-hours Tuesday and were up 14% through the premarket morning, after the pioneer in the movie rental business beat the street with its quarterly earnings. Netflix grew EPS by 55% in its fourth quarter, with its $0.87 in EPS exceeding the analysts' consensus of $0.71 by 22.5%. The growth came on 34% revenue growth, which was short of but close enough to the analysts' consensus for the top line.

The blockbuster growth was driven by better than forecast subscriber growth. The company added 3.08 million new subscribers in the quarter, some 500K more than analysts had forecast. Netflix grew subscribers at a fierce rate of 18% from the third quarter, and at a count of 20.01 million, it can now boast the third largest US video subscription service, behind Comcast (Nasdaq: CMSCA) and DirecTV (Nasdaq: DTV).

Subscriber growth was certainly lifted by its late year launch of its unlimited streaming-only subscription plan. The company's expansion into Canada, while generating an international operations operating loss momentarily, will be followed shortly with a launch into a second international market. I'll go ahead and speculate that to be the United Kingdom, because it just makes sense due to language, custom and technological consistencies. Netflix estimates that it will take about 8 quarters to turn that second market profitable; we say it will happen quicker, as is occurring with the Canadian market. We expect Netflix is underestimating its brand power and the nearness of the global community.

The leverage of revenue over operating expenses allowed for operating margin expansion and operating profit growth of 47%. Since the company had been buying back shares, the lower count allowed for even faster EPS growth. It appears the company also produced the most free cash flow in its history this past quarter.

We find Netflix's partnership with Amazon.com (Nasdaq: AMZN) quite interesting. What already appears to be a complementary fit, is now working together, and we have to wonder if either Netflix or Amazon knew exactly what they were doing by engaging the other when this deal formed. In case you were not aware, Netflix has shifted from its own servers to AWS servers, and things got a whole lot easier for them since.

I must say that I've read a lot of earnings releases over the years, and have rarely come across the tone found in Netflix's news. Perhaps this is the direction we're heading, casual conversation on corporate releases, but sometimes people and corporate executives speak perfectly and the words are all made up (God knows I've seen too much of that on Wall Street). One thing I like about the Netflix team though is the candid conversation, and perhaps this is why the company does not take live questions on its conference calls; they might accidentally say too much to the rightly posed query.

The management team of this firm might not be up to par with the task at hand, or perhaps it is precisely because the CEO and Founder cares about his company so much that it will continue to astound. Usually though, these guys are pushed out, and it's unfortunate, because these companies are their babies. I feel I should say congratulations to Netflix's founder, for thinking outside the box, and then doing it again when the box changed. All small businessmen should be inspired by this success. Still, I will say that the trouble with the forecasting we saw this quarter, which resulted in a wildly positive surprise and stock surge, might someday lead to a bad miss or reflect a poor decision.

That said…

Given the big miscalculation by analysts this past quarter, let's assume the high estimate for 2011 is correct, and NFLX will earn $4.55. Let's say the stock opens where after hours trading took it, at $202. That gives NFLX a P/E ratio of roughly 44 on the forward estimate. The growth that estimate projects for the company in 2011 is 54%, and it would seem, if this or somewhere near is more correct than the conservative consensus estimates out there, then the high flying stock might not be overvalued.

Whenever you get an unsustainable growth rate, though, and a P/E value that nearly matches it, you're going to find volatility and sensitivity to news. Thus, even though the PEG ratio might be 0.8 when applying that one-year growth, or close to 1.0 for a lesser three-year growth rate, owning the shares is not for the faint of heart. That said, the run up after hours appears justified to me, and the stock still seems a proper fit for aggressive investors.



Disclosure: I have no interest in any mentioned stock.

This article should interest investors in Disney (NYSE: DIS), DreamWorks Animation (NYSE: DWA), Cinemark Holdings (NYSE: CNK), Regal Entertainment (NYSE: RGC), RealD (NYSE: RLD), Lions Gate Entertainment (NYSE: LGF), Rentrak (Nasdaq: RENT), Carmike Cinemas (Nasdaq: CKEC), LYFE Communications (OTC: LYFE.OB), New Frontier Media (Nasdaq: NOOF), Public Media Works (OTC: PUBM.OB), Independent Film Development (OTC: IFLM.OB), Point 360 (Nasdaq: PTSX), Seven Arts Pictures (Nasdaq: SAPX), Affinity Medianetworks (OTC: AFFW.OB), Time Warner (NYSE: TWX), News Corp. (Nasdaq: NWSA), Vivendi (Paris: VIV.PA), Liberty Starz Group (Nasdaq: LSTZA), McGraw-Hill (NYSE: MHP), Pearson Plc (NYSE: PSO), John Wiley & Sons (NYSE: JW-A, NYSE: JW-B), Scholastic (Nasdaq: SCHL), Courier (Nasdaq: CRRC), Noah Education (NYSE: NED), Peoples Educational Holdings (Nasdaq: PEDH), Barnes & Noble (NYSE: BKS), Amazon.com (Nasdaq: AMZN), Books-A-Million (Nasdaq: BAMM) and Borders (NYSE: BGP).

Other of the day's corporate EPS Wednesday came from from Qualcomm (Nasdaq: QCOM), Abbott Labs (NYSE: ABT), Boeing (NYSE: BA), Symantec (Nasdaq: SYMC), Teradyne (NYSE: TER), Citrix Systems (Nasdaq: CTXS), Astoria Financial (NYSE: AF), BOK Financial (Nasdaq: BOKF), Canadian Pacific Railway (NYSE: CP), Cohu (Nasdaq: COHU), ConocoPhillips (NYSE: COP), Cooper Industries (NYSE: CBE), Covance (NYSE: CVD), E*Trade (Nasdaq: ETFC), Eastman Kodak (NYSE: EK), General Dynamics (NYSE: GD), International Shipholding (NYSE: ISH), Kyocera (NYSE: KYO), Legg Mason (NYSE: LM), Logitech International (Nasdaq: LOGI), LSI Corp. (NYSE: LSI), McCormick & Co. (NYSE: MKC), MeadWestVaco (NYSE: MWV), Netflix (Nasdaq: NFLX), Occidental Petroleum (NYSE: OXY), Rockwell Automation (NYSE: ROK), SAP (NYSE: SAP), SEI (Nasdaq: SEIC), Southern Co. (NYSE: SO), Starbucks (Nasdaq: SBUX), Tractor Supply (Nasdaq: TSCO), United Technologies (NYSE: UTX), Valero Energy (NYSE: VLO), WellPoint (NYSE: WLP), and Xerox (NYSE: XRX).

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