The tech sector has fallen a long ways since the heady
days of the dot-com bubble. But if you're looking for stocks
trading at lofty multiples, technology and e-commerce might
still be your best bet.
One of those seemingly pricey stocks right now is
movies-by-mail pioneer
Netflix (Nasdaq: NFLX). This stock is worth
31 times the company's trailing earnings and 24 times the
average analyst's forward estimates. That's pricey by most
standards, and right up there with
Google 's (Nasdaq: GOOG) 21 times next-year
earnings or
Apple 's (Nasdaq: AAPL) 33 times trailing
earnings multiples.
But I hate to look at P/E ratios when it comes to Netflix.
This company is actually the very reason
why
I don't trust price-to-earnings figures
in general. Why? Let me explain.
Pedal to the metal
See, Netflix can control its earnings to a very large
extent.
CEO Reed Hastingsand his gang have a gas pedal at their
feet, and can adjust earnings to their hearts' content: If
business is bad and the new subscriber count isn't rising
quickly enough, management pulls back on advertising
expenses. When consumers are responding to marketing, sales
will increase, and so will the marketing push.
The current stated goal is to stay at a 10% operating
margin, and that's easily done by adjusting the advertising
budget. Since the company is managing its expenses with tight
reins on that important expense, you can assume that earnings
will stay pretty stable -- come hell or high water. And
that's why the P/E ratio means next to nothing for this
company.
OK, then what
doyou look at?
It's more instructive to look at
cash flowshere. That figure will give you a truer sense
of how Netflix is doing than the deftly manipulated and
static earnings ever will.
And from that perspective, Netflix suddenly doesn't look
too pricey anymore. Netflix has grown its free cash flows by
57% a year over the last three years, and the price-to-FCF
ratio has stabilized in the lower 20s -- currently at 23.2
times trailing free cash flow according to Capital IQ.
That puts Netflix right next to
grown-up value play
Microsoft (Nasdaq: MSFT), which trades at
23.4 times trailing cash flows -- but Netflix is smaller and
is growing faster, which means
it really should be worth more. Google lands at more than
37 times free cash flows today, and Apple's cash-making
powers puts a price tag of 22.4 times trailing cash on that
stock.
Cherry-picking
You might want to accuse me of cherry-picking a metric
to make Netflix look cheap. If that's what I wanted to do, I
could put this stock's 13.2 EV/EBITDA ratio next to
Amazon.com (Nasdaq: AMZN) and its 40.4 data
point. Maybe I'd point out that
lululemon athletica (Nasdaq: LULU) sports
about three times the price-to-sales ratio Netflix does. The
truth is, Netflix doesn't look terribly cheap by cash-flow
measures, and I'm not going to pull the wool over your eyes
by saying it's a screaming buy. It's not. Continued... |