Netflix Is Down $200 in Three Months

Eighteen months ago, I called Netflix ($NFLX) “The Absolute Worst Stock to Buy Right Now.” Ugh; not one of my better calls. The posting even caused the CEO to send me a snippy email.

This was part of my post:

Last year, Netflix made $115.9 million of sales of $1.67 billion. That works out to earnings of $1.98 a share. The stock, however, is currently around $86 or 43 times trailing earnings. The shares were overpriced at the start of the year and they’re up another 55% since then.

When the fourth-quarter earnings came out in January, Netflix said that it expects full-year earnings-per-share for 2010 to range between $2.28 and $2.50. So even going by the top end of forward earnings, NFLX is still trading with a P/E ratio of around 35 which is more than twice the S&P 500. That’s just crazy.

Seems reasonable, but it was one of the worst calls I’ve ever made. At the time, the stock was at $87. Three months ago, NFLX hit $304.79.

To be fair, I continued to call the stock horribly overpriced. For example, when it hit $110 or when it hit $188 or when it hit $230 or when it hit $267. Hey, at least I’m consistent.

To be a good investor, you need to look at your mistakes. So why was I so off about Netflix? I think my analysis was right but I was wrong on just how irrational the market can be — and how long it be irrational for. In the end the facts win, but that can take awhile.

Today, shares of Netflix hit $103.13 which is a loss of $201.66 in just three months. I don’t believe that Netflix is down so much because they upset their customers and made some bad moves at damage control. Of course, that’s part of the move but that alone doesn’t cause a company to lose two-thirds of its value in a matter of weeks.

Instead, the severe drop was due to a vastly inflated share price. The price issue was merely a catalyst for the momentum investors to get out. And they did.

Posted by on October 11th, 2011 at 12:13 pm


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