Is Netflix too expensive?

As high-speed internet becomes a household staple, Netflix has been stepping up its online-streaming video business. 66% of its subscribers watched streaming videos in the third quarter, up from 61% in the second quarter and 41% a year ago. Falling subscriber acquisition costs eased the earlier concern that it may become harder/costlier to get customers as competition emerged. Subscriber acquisition costs fell to $19.81 in the quarter, down from $24.37 in Q2, and $26.86 a year ago. Another important measure, the churn rate, which measures the percentage of customers dropping out was also very positive. Churn fell to 3.81%, from 4.0% in Q2, and 4.4% a year ago.

Guidance was upbeat. In the earnings result that was released today, the management raised the guidance of the number of subscriber this year to a range from 19 million to 19.7 million from a previous estimate of 17.7 million to 18.5 million. If this comes true, the company will have doubled its subscriber base in two years since its first streaming service. Revenue for the fourth quarter was also raised to $586 million to $598 million  from $580 million to $596 million. On the earnings side, the company continues to see the fourth quarter EPS of $0.59-0.74a share.

It was a very good earnings release, to say the least. What now? One question that lingers on is whether the stock of the company is too expensive.The company at its closing price today, $153.15 is 55 times its 2010 EPS and 41 times its 2011 EPS. This is way higher than conventional standard of P/E ratio. That said, many would argue that P/E ratio is irrelevant when it comes to growth stocks, PEG which is P/E divided by growth rate is more relevant. At a P/E of 55, Netflix will have to sustain a 55% or higher growth rate in the relevant time frame into the future. So, is this growth sustainable? We will leave this question to the next post.

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Disclosure: The blog author does not have any position of NFLX in her personal account as of October 20, 2010