Netflix Inc. shares soared into record territory on Tuesday after second-quarter results that showed a surprise jump in international subscriber numbers, but analysts cautioned that the streaming company’s stock could be stretching too far.
Netflix shares surged 11% to trade as high as $177 in early trade, exceeding the record close of $165.88 and intraday high of $166.87 set on June 8. Analysts and experts are starting to sound the alarm about the company’s price-earnings ratio, which at a staggering 197 times, according to FactSet, exceeds that of another stock with a lofty valuation, Amazon.com Inc. AMZN, +1.31% at 190 times.
“I think chasing Netflix now is an expensive affair,” wrote Seeking Alpha contributor David Butler. “It seems to be following the same mania as Tesla and Amazon where investors will run up the price on speculation alone regardless of actual earnings. To a degree it makes sense, but things are getting out of hand.”
Netflix NFLX, +13.69% reported revenue of $2.79 billion, up from $2.11 billion last year and ahead of the $2.76 billion FactSet consensus. Earnings of 15 cents per share were up from 9 cents per share last year but missed the FactSet consensus of 16 cents. Streaming membership grew to 104 million, with the international segment now accounting for 50.1% of the company’s total membership base.
Citigroup’s Mark May said that while he’s “positive” on the long-term outlook of the business, the bank’s analysis “also suggests that the current price already reflects this view.”
SunTrust Robinson Humphrey analysts homed in on the company’s free-cash-flow losses as a worry, describing it as “again the only blemish” in the earnings and speculating that “another debt raise is possible by year-end.”
Netflix said free-cash-flow losses rose to $608 million in the quarter from $254 million a year ago, and said they are expected to come to between $2 billion and $2.5 billion for the full year.
Chief Executive Reed Hastings put a positive spin on the matter on the earnings call, according to a FactSet transcript: “The irony is the faster we grow and the faster we grow the owned originals, the more a draw on free cash flow that will be,” he said. “So, in some senses, the negative free-cash flow will be an indicator of enormous success.”
J.P. Morgan analysts were more sanguine, saying the cash burn could be an issue for some, but the benefits are worth it.
“Free-cash-flow burn will remain the strongest pushback to the Netflix story, but given the large market opportunity, we continue to like that Netflix is optimizing for revenue growth and subscriber penetration, with reasonable profitability and long-term free-cash flow generation,” analysts led by Doug Anmuth wrote in a Tuesday note. Anmuth rates Netflix shares overweight and raised his price target to $210 from $178.
RBC Capital Markets struck a bullish tone, saying the stock still has room to grow.
“We believe that Netflix has achieved a level of sustainable scale, growth and profitability that isn’t currently reflected in its stock price,” analysts wrote. “This conclusion is based on our assessment of Netflix’s 52 million U.S. subscriber and 52 million international subscriber bases, which makes Netflix one of the largest global entertainment subscription businesses.”
RBC rates Netflix shares outperform and raised its price target to $210 from $175.
Netflix shares are up 44.7% for the year so far, outpacing the S&P 500 index SPX, -0.02% which is up 9.5% for the period.
Barbara Kollmeyer and Ciara Linnane contributed to this report.