Netflix, Inc. (NFLX): Why You Shouldn’t Be So Thrilled

Netflix CEO Reed Hastings has stated in the past that he wants to become more like popular TV networks such as HBO. This was one of the main justifications for the company’s push into first-run TV shows and other exclusive content. However, the market is giving Netflix a valuation significantly above that of many TV networks. Netflix, Inc. (NASDAQ:NFLX)’s fully diluted enterprise value of more than $12 billion is roughly double that of AMC Networks Inc (NASDAQ:AMCX). AMC is a fairly successful cable network, with hit series like Mad Men, Breaking Bad, and The Walking Dead: shows that happen to be cornerstones of the Netflix content library.

Netflix is also worth almost half as much as CBS, which owns the highest-rated TV network as well as half of The CW (another national network), Showtime, and various other media assets. While Netflix is still worth far less than HBO parent Time Warner Inc (NYSE:TWX), Time Warner Inc (NYSE:TWX) owns several highly successful cable networks and a variety of other media businesses. Investors are valuing Netflix like it will eventually become the equivalent of not just a TV network, but a highly successful media conglomerate. While this is not impossible, it seems to be a very bullish “best-case scenario” for the company.

Foolish conclusion
Netflix investors should take a moment to savor this week’s gains —  and then think seriously about whether they are likely to hold over the long term. While buy-and-hold is usually the best investing strategy, it’s still a good idea to sell stocks that become significantly overvalued. While Netflix beat earnings expectations last quarter, it is still burning cash and content costs are rising, and yet it is valued similarly to the most profitable TV networks. These factors mean that there is a good chance that Netflix, Inc. (NASDAQ:NFLX)‘s valuation will fall back to earth (again) in the next few years.

The article 3 Reasons Netflix Investors Should Not Be So Thrilled originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg is short shares of Netflix and Amazon.com. The Motley Fool recommends Amazon.com, AMC Networks, and Netflix. The Motley Fool owns shares of Amazon.com and Netflix.

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