Netflix rules as S&P 500’s top stock spurring bubble talk

Internet TV

One of Hastings’s key messages to investors has been about that growth Pachter says Internet investors are focused on. The CEO says Netflix is “leading the way” toward “Internet TV,” a concept designed to rival cable.

Other key metrics in assessing the company include revenue, subscriber numbers and, in the long term, profit. Netflix revenue was $3.6 billion last year, up from $3.2 billion the year before.

Profit was $17.2 million in 2012, after rising annually since 2003. Profits peaked at $226.1 million in 2011. That drop in 2012 was partly because the company offered more free-trial subscriptions. Overseas that promotion resulted in a first- quarter loss of $11 per customer, according to company filings.

The profit trend improved in the first quarter. Net income of $2.7 million compared with a year-earlier loss of $4.6 million. For all of 2013, analysts tracked by Bloomberg estimate profit of $1.44 a share in profit, an increase from 2012’s 29 cents, according to data compiled by Bloomberg.

52-Week High

In the face of these results, the company’s stock reached a 52-week closing high of $267.92 on July 17 and now trades at 383 times 12-month profit, surpassed only by Alcoa Inc. in the S&P 500, data compiled by Bloomberg show. Its estimated price/earnings ratio for 2013 is 184. The P/E ratio for the S&P 500 Index is currently 16. Netflix’s 185% gain this year is the best in the S&P 500.

Netflix rose 84 cents to $265.46 on trading on the Nasdaq Stock Exchange as of 10:44.

“The current valuation reflects unrealistic expectations across all major economic and strategic levers of the business,” Sanford C. Bernstein & Co. analyst Carlos Kirjner wrote in a June 25 report when he downgraded the stock to “underperform” with a price target of $180, about a third lower than what it closed at last week.

At the same time, Netflix has to deal with the perception that market forces may interfere with its customer-growth goals. Hastings has said he would like to get 60 million to 90 million U.S. customers, about two to three times HBO’s domestic total.

Limited Market

Here is how one skeptic sees that plan: Netflix’s potential market is the 45 million households that have broadband connections powerful enough to support Netflix’s streaming video products and to connect their TVs to the Internet today, Kirjner said in his June 25 report. That market may grow to 65 million in several years, and Netflix might eventually get as many as 43 million subscribers, he said. Mobile broadband will not support Netflix “at scale” when carriers place data caps, he said. In a July 15 report, Kirjner said his forecast of the potential market is “perhaps too generous.”

Netflix disagrees, saying customers can use a mobile device with WiFi. Its “addressable market” is 80 million U.S. households with some kind of broadband Internet access, according to spokesman Friedland.

There has been a debate too about Netflix subscriber numbers. Consider the April 22 report by Variety that Netflix had passed HBO in “total” U.S. subscribers. That report by the entertainment industry bible and other news organizations played a role in one of Netflix’s best stock moves: a 24% gain.

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