Has Netflix (NFLX) stock finally peaked? It’s a question many investors have incorrectly speculated about for more than a decade. Is this time different? Don’t hold your breath.
According to Stifel Nicolaus analyst Scott Devitt, who downgraded the shares Tuesday from Buy to a Hold, there’s too much valuation risk for Netflix stock to outperform the market. That is, of course, until the company’s fundamentals catch up with the stock. “We are downgrading shares of Netflix on valuation, as the stock has appreciated to our new $325 12-month price target,” Devitt wrote in a note to investors Tuesday.
Netflix shares, which have skyrocketed about 130% in twelve months, had soared 70% year to date through Monday. The company had been unstoppable, posting all-time closing highs in numerous trading sessions, despite the increase in market volatility that has pressured its FAANG peers.
“We are attracted to Netflix's business and competitive position but believe share price may have sprinted ahead of fundamentals in the short-term," Devitt wrote. Based on Monday’s closing price, Netflix shares were valued at almost 120 times fiscal 2018 consensus profit estimates of $2.71 per share. This compares for a forward P/E of 18 for the S&P 500 index. Among the FAANG group, only Amazon (AMZN) — at a forward P/E of 185 — was more expensive.
But like Amazon, Netflix hasn’t always (if ever) traded on fundamentals, or for that matter, conventional metrics. Subscriber growth has been the main story. And it continues to dominate in that department. The internet movie streaming giant had been riding a hot hand since reporting its best single-quarter for subscriber growth in January. The company added 8.3 million subscribers in Q4, crushing the Wall Street estimate for 6.4 million new subscribers.
And, there’s more where that came from, according to BTIG Research analyst Rich Greenfield, who came to the company’s defense Tuesday. The longtime Netflix bull increased his 2018 international subscriber forecasts by 43% and now expects Netflix to report net additions of 23 million, up from prior estimates of 16 million. He also raised next year’s estimates by almost 50% from 17 million to 25 million.
Greenfield is not alone in his positive outlook. On Monday Netflix received strong endorsements from analysts at both UBS and Macquarie, who cited the strength of its international subscription growth and investments in original content. UBS has a $345 price target on the stock, suggesting a 6% premium from current levels.
To be sure, Devitt did leave the door open, in case his thesis proved incorrect, saying, “If Netflix continues to meaningfully exceed investor hurdles for net subscriber additions into 2018, momentum in Netflix shares could continue.” In other words, Netflix must prove it deserves more upside. But as it has shown its doubters over the past several years, playing it safe can be just as costly.