A leading member of FANG, Netflix ($NFLX) is the second-most expensive component behind Amazon ($AMZN). Even though it has a P/E multiple of nearly 300, the stock was able to continue violently skyrocketing in 2015. Considering such an expensive traditional valuation, most financial pundits were expecting Netflix’s stock to really break down during any kind of market correction. The fact that it still trades above $100 and not around the $85 level in the current market environment kind of disproves that theory.
So if we can’t value Netflix traditionally, how do we value it? Well, I look at Netflix as a public “unicorn” in terms of valuation. Other public unicorns in my eyes include Twitter, GoPro, and Etsy, for example. Businesses that are fine on their own, but aren’t necessarily meant to grow to the scale of their competitors. If that offends you, I don’t care. With Netflix, I felt back in the summer of 2015 it would only be fair to value it on the basis of a private unicorn. A disruptive service with a growing global reach that also is seemingly overvalued to a great degree. I decided that Uber was the closest type of unicorn that I could fairly value Netflix based off of for having those same qualifications. My price target for Netflix has changed over the past few months as new reports of Uber’s valuation changing have come out. The most recent report has Uber valued at $62.5B (nearly $20B more than Netflix at current prices). Naturally, my Netflix target goes up with that. Based on current shares outstanding, my $NFLX PT is $146.When it gets there, I would sell; no questions asked.
As we have begun to see, the private unicorns’ investors have started to see the truth of overly expensive valuations, with companies such as Fidelity taking write-downs on their stakes. Public unicorns have taken a real beating as well, with the specific exclusion of Netflix.
As of right now, I have no position in NFLX. However, by ignoring the traditional metrics the bears compare it to, I was able to make relatively easy money with it in 2015. I don’t use this method to value any other company besides Netflix, and I would be foolish to do so. I hope this post is able to put some perspective behind the “insane valuation” of Netflix. Somehow, I don’t think I’m the only person valuing public unicorns versus private unicorns.
