Will Netflix Growth Bubble Burst on David Einhorn's Take?

Video streaming company, Netflix, Inc. NFLX has been criticized by David Einhorn, a renowned hedge fund manager and founder of Greenlight Capital, who believes that the company is grossly overvalued.

In a letter to investors, Einhorn argued that Netflix shares spiked despite missing earnings estimates in the last–reported quarter. Moreover, the declining earnings estimates have also not been heeded as a warning by investors.

Einhorn also criticized Netflix's original series House of Cards. He stated that it's overrated and has been made only to compete with Ambien.

While it's true that Netflix has been facing declining estimates lately, the company has also shown its commitment to growth, with global expansion plans and efforts to expand its subscriber base.

What Do the Numbers Say?

Downward estimate revisions in the past 30 days have pushed down the Zacks Consensus Estimate for 2015 by 1.9% to $1.54 while the same for 2016 dipped 5.4% to $3.18 per share.

Moreover, the stock does appear overvalued with a high PEG ratio of 21.48, compared with the industry figure of 5.28. The P/E ratio is also not in favor of the company at 442.52 against the industry's 42.8.

Einhorn argued that despite the statistics, Netflix shares have been gaining steadily. In the year-to-date time frame, the stock has surged over 107%. In the same period, the returns from S&P 500 index were only about 1.98%.

Not only this, the company had recently declared a 7:1 stock split after increasing its share authorization from 170 million to 5 billion (including preferred stock). The split will be in the form of a stock dividend of six additional shares against each outstanding share. The stock dividend is set to be paid today, to stockholders of record as of Jul 2, 2015.

Our Take

Netflix is no doubt overpriced at present. Nonetheless, the company is taking measures like providing skinny bundles to claim a greater share of the U.S. market and is simultaneously planning rapid expansion abroad. Recently, the company announced plans to expand its offerings to Japan, India and China.

While such initiatives will definitely bring subscriber growth in the long run, there could be near-term pressure as content acquisition costs continue to escalate.

Netflix is set to report second-quarter 2015 results on Jul 15.

Currently, it carries a Zacks Rank #3 (Hold). Better-ranked stocks in the space include Salem Media Group, Inc. SALM, Discovery Communications, Inc. DISCK and Sirius XM Holdings Inc. SIRI. While Salem Media sports a Zacks Rank #1 (Strong Buy), Discovery Communications and Sirius XM each carry a Zacks Rank #2 (Buy).

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