The world most expensive stock

Probably everyone here knows Netflix (NFLX). Back 5 years ago, I used to be a happy customer for its convenient film DVD renting business. Indeed it was really a great business that one could simply order online with free delivery and return. I must say I was not clever enough to understand its potential as an investment and have never thought about buying its stocks. In the past few years, Netflix has successfully pioneered the online video streaming service that has basically replaced the DVD rental business. It has become so popular that its stock has really skyrocketed into the moon. It has indeed done a great job in expanding its customer basis, not only domestically but also now quickly into the international markets. Netflix has now over 62 million subscribers worldwide. With the stock price so much inflated, it is now a company bigger than Sony in terms of the market cap ($38 billion). Is its stock price justifiable based on valuation? Not an iota! Actually Netflix is one of the most expensive stocks in the world with a ridiculously expensive valuation. When you look the key probability metrics for Netflix, you will be surprised to see that it is not a very profitable business: profit margin at only 4.09%, operational margin at 6.9%, and return on equity at 14.02%. It is beyond my ability to understand how such a mediocre profitability can justify its nose-bleedingly high PE at 172. In other words, one has to wait for over 170 years to get their investment back. In addition, another good barometer for a stock’s value is the PE to Growth (PEG). With PEG at 1.0 as considered a fair value for a company, Netflix’s PEG is of another nose-bleedingly high at 19. In other words, by all means, Netflix is greatly overvalued.

To be honest, I’m very itching to short Netflix given the risk of tanking for Netflix is quite high. But it is not so easy. With such a high-flying stock that almost everyone loves, it is too risky to short its stock naked. Using options is certainly more favorable but again the option prices are heavily inflated. Now Netflix is planning to split its stock. Maybe after the split with its nominal share price coming down, it’s a bit easier to short it. If you are a lucky shareholder, you need to be aware of the risk associated with it. It is a great company as a business but it is a terrible one for investment. Watch your downside closely!!