Is Netflix’s Stock Overvalued or Undervalued?

The Netflix sign is seen at the company’s headquarters in Los Gatos, Calif., in a file photo. (Justin Sullivan/Getty Images)

Netflix shares have outperformed the S&P 500 in 2021, generating a year-to-date total return of 25.9 percent.

But after gaining 114.6 percent in the past three years, investors may be wondering if there’s any value left in Netflix stock.

Earnings

A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is at about 29, nearly double its long-term average of 15.9.

Netflix’s PE is 62.4, more than double the S&P 500 average as a whole. However, Netflix’s PE ratio is also down 81.7 percent over the past five years, suggesting the stock is priced at the low end of its historical valuation range.

Growth

Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.6. Netflix’s forward earnings multiple of 51.9 is still more than double the S&P 500’s, making Netflix’s stock look overvalued.

Netflix’s forward PE ratio is also more than double its communication services sector peers, which are averaging a 21.3 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren’t everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 0.9; Netflix’s PEG is 1.47, suggesting Netflix is significantly overvalued after accounting for its growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.15, well above its long-term average of 1.62. Netflix’s PS ratio is 10.2, more than three times the S&P 500 average as a whole.

Finally, Wall Street analysts see little value in Netflix stock over the next 12 months. The average analyst price target among the 41 analysts covering Netflix is $705, suggesting 4.1 percent upside from current levels.

The Verdict

At its current price, Netflix stock appears to be overvalued based on a sampling of common fundamental valuation metrics.

By Wayne Duggan

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