Is Netflix, Inc. (NFLX) Too Expensive?

With a P/E ratio of 517 times, Netflix is trading near the top of its five-year P/E range of 15 times to 570 times. Netflix also has a PEG ratio in excess of 8, while Amazon is at 5.15. What’s more is that while Netflix’s price continues to soar, it’s free cash flow generating capabilities and return on equity have been in steady decline.

Netflix has grown EPS at an annualized negative 7% over the last five years, and although the future is brighter, I don’t think it justifies a premium valuation to Amazon, nor a P/E in excess of 500 times.

Hedge fund trade

Going into 2013, there were a total of 58 hedge funds long Amazon. Billionaire Ken Fisher’s Fisher Asset Management had the largest position by market value in the company, worth $613 million (see Fisher’s dividend stocks). While Amazon had the maximum interest from hedge funds going into 2013, Netflix, Inc. (NASDAQ:NFLX) saw some of the best sentiment, having 30 hedge funds long the stock, which was a 30% increase from the third quarter. The largest position held was by billionaire Carl Icahn, with a $514 million position that made up 4% of his 13F portfolio (check out Icahn’s small cap picks).

Of the companies listed, Coinstar had the lowest hedge fund interest, with only 28 hedge funds long the stock at the end of 2012. This includes Marathon Partners and billionaire Jim Simons’ Renaissance Technologies (check out Simons’ high yielding picks).

Conclusion

The current momentum in Netflix, Inc. (NASDAQ:NFLX)’s stock is similar to the January 2010 and July 2011 rally the company experienced, with the stock crossing $250 to reach its all-time high of over $300, but eventually came crashing back to reality. The stock is already up over 125% year to date.

So, currently it looks like the bear case is greater than the bull scenario, with concerns over rising content acquisition costs, negative cash flow, and limited success in international markets should cause concerns for investors.

The article Why Netflix Is Too Rich for My Blood originally appeared on Fool.com and is written by Marshall Hargrave.

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