But that said, shares of Tesla Motors Inc (NASDAQ:TSLA), Zillow Inc (NASDAQ:Z) and Netflix, Inc. (NASDAQ:NFLX) are definitely trading at excessive valuations. That isn’t to say that they’re inevitably poised for a decline, just that the stocks appear to be priced for the most optimistic of outcomes.
Tesla needs to outsell the Chevy Malibu
Forget producing an electric car for a niche audience. At current levels, Tesla Motors Inc (NASDAQ:TSLA) needs to make a car capable of outselling General Motor’s longstanding family sedan, the Chevy Malibu, and it has just seven years to do it.
In 2012, the Chevy Malibu sold just over 200,000 vehicles in the US. A disappointment for GM, but still roughly 10 times greater than the number of Model S sedans that are expected to be sold this year.
But Bank of America argues, for Tesla to justify its present share price, it will need to sell somewhere around 320,000 vehicles per year in 2020. A tall order, and one that Bank of America doesn’t expect the company to live up to.
In short, for Tesla Motors Inc (NASDAQ:TSLA) to justify its current valuation, its cars must transition from being a high-end luxury to a mass market product. And while seven years might seem like a long time, it isn’t when it comes to cars — the Model S itself has been in production for over four years.
Zillow’s PE ratio is shockingly high
Zillow Inc (NASDAQ:Z)’s current price-to-earnings ratio is over 7,000 — 7,420 to be exact. That’s more than 400 times greater than the broader S&P 500 index.
Zillow has an interesting underlying business — it’s quickly becoming the go-to real estate website in the US. And given the ongoing recovery in the housing sector, this puts it in an attractive position.
Analysts have noted the company’s aggressive valuation, and have acted accordingly.
Analysts at Goldman Sachs downgraded Zillow Inc (NASDAQ:Z) to Neutral back in May, noting that the stock’s current valuation reflected any potential positive outcomes. Citi came to a similar conclusion earlier this month, initiating the stock with a Neutral rating, and arguing that the stock’s present valuation took into account the most bullish of outcomes.
Netflix needs to add subs — a lot of them
Netflix, Inc. (NASDAQ:NFLX)’s price-to-earnings ratio of 632 is certainly excessive, but relatively tame compared to Zillow’s. Yet, more crucial than earnings may be Netflix’s ability to add subscribers.
Netflix, Inc. (NASDAQ:NFLX) is at key stage in its ongoing transition to become an online TV network. The streaming giant has committed billions to content providers for original and exclusive content, and it needs new subscribers to make good on those commitments.
At the end of March, Netflix stood at just over 29 million US subscribers. This is significant as it’s near the all-important 30 million threshold, a number that HBO has long struggled (and failed) to break above.
Netflix, Inc. (NASDAQ:NFLX) has a more palatable distribution model than HBO (you don’t need cable to buy it, and it’s cheaper), but it will be interesting to see if Netflix can elude the so-called “Chanos Rule” (named after short seller Jim Chanos who has observed the 30 million wall run into by numerous companies over the years).
Netflix, Inc. (NASDAQ:NFLX)’s CEO Reed Hastings thinks he can grow Netflix’s subscriber base to 90 million in the coming years. If it he can hit that goal, Netflix, Inc. (NASDAQ:NFLX)’s stock may be reasonable even at these levels, but if he can’t, the bulls will be hurting.
As I’ve written previously, this recent quarter is unique for Netflix in that it lost vast quantities of children’s programming (mostly Viacom content). Going forward, Netflix, Inc. (NASDAQ:NFLX) may have to shed more of these bulk content deals so that it can continue to invest in original programming.
But if some of its subscribers, perhaps angered by the loss of Viacom, abandoned the service, Netflix’s stock could crater.
Investing in overvalued companies
Don’t get me wrong — I’m not saying the stocks of these companies are all poised for a near-term collapse. Actually, given that all of them have relatively high levels of short interest, the bull run could continue unabated for quite some time.
That said, at these levels, Tesla, Zillow Inc (NASDAQ:Z) and Netflix, Inc. (NASDAQ:NFLX) appear to be priced for perfection. Tesla Motors Inc (NASDAQ:TSLA) will need to transition to a mass-market auto company in less than a decade, Zillow will need to increase its earnings significantly, and Netflix will need to continue to add millions of subscribers each quarter.
While these scenarios are certainly possible, they are incredibly optimistic. Investors should weigh the likelihood of these outcomes in their investment decisions.
The article These Stocks Are Overvalued originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Sam Mattera is long Tesla Puts dated September 2013. The Motley Fool recommends Netflix, Inc. (NASDAQ:NFLX), Tesla Motors Inc (NASDAQ:TSLA), and Zillow Inc (NASDAQ:Z). The Motley Fool owns shares of Netflix, Tesla Motors Inc (NASDAQ:TSLA), and Zillow Inc (NASDAQ:Z). Salvatore “Sam” 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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