That’s why investors shouldn’t be surprised that Netflix, Inc. (NASDAQ:NFLX) is down in the wake of its disappointing, albeit impressive, results. Of course, Netflix bulls will point to the fact that future earnings growth will be such that today’s exorbitant valuation isn’t as bad as it seems. In a sense, the stock will grow into its rich valuation with stunning growth in profits.
However, even when accounting for huge growth in the near future, these stocks still trade for sky-high valuations that should make investors nauseous. LinkedIn Corp (NYSE:LNKD), Amazon, and Netflix trade for forward P/E ratios of 93 times, 95 times, and 85 times, respectively.
We’ve seen this movie before
Investors would be well-served to remember that Netflix, Inc. (NASDAQ:NFLX) has gone on this kind of a rollercoaster ride before. The stock went from $50 per share in January 2010 all the way to nearly $300 per share by July 2011. Analyst and investor expectations rose along with the stock price on broad optimism over the company’s supposedly unstoppable growth trajectory.
Then, as is now routinely common, Netflix’s subscriber and revenue growth failed to meet the irrationally exuberant expectations embedded in such a dramatic rise in share price. The stock proceeded to decline all the way down to $63 before the year was over.
Put simply, the time to buy is not after a stock has already doubled or tripled. For prudent investors who take risk management seriously, the risk of missing out on additional upside after such a strong rally is often much lower than the risk of buying in just before a decline.
Netflix, Inc. (NASDAQ:NFLX), LinkedIn, and Amazon are all extremely popular companies with millions of satisfied members and services. I have utilized their services many times, and would be the first to admit that each company revolutionized its respective industry.
At the same time, however, successful investing isn’t about jumping on a bandwagon. Investors would be wise to remember that even great companies can amount to poor investments over time if too high a price is paid for a stock’s underlying profits. And, with respect to Netflix, as well as Amazon and LinkedIn Corp (NYSE:LNKD) for that matter, future earnings growth is simply not likely to justify the dangerously high prices investors are paying today.
The article Why Investors Should Not Subscribe to This Growth Stock originally appeared on Fool.com and is written by Robert Ciura.
Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Inc. (NASDAQ:AMZN), LinkedIn, and Netflix. The Motley Fool owns shares of Amazon.com, Inc. (NASDAQ:AMZN), LinkedIn Corp (NYSE:LNKD), and Netflix, Inc. (NASDAQ:NFLX). Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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