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Netflix Is Overpriced but Apple Is On Sale

Stocks in this article: AAPL NFLX DIS FSLR CMG AMZN CSTR

The following five-year chart speaks volumes about how NFLX's share price has run the roller-coaster gamut and why shares tumbled last year after being hit with the fact that in the prior quarter NFLX's quarterly earnings growth had dropped almost 88% and the company was mired in $400 million in debt. Yet in spite of those financial realities the shares are skyrocketing!

NFLX Chart NFLX data by YCharts

Its cash from continuing operating is a big issue, and so is the debt load. On a positive note its still has ample levered free cash flow. Yet, the buying frenzy in NFLX shares over the past two days can't be fundamentally justified by the numbers and the company's comments.

The AP article sited above described it this way, "Investors were euphoric. Netflix's volatile stock soared $36.24, or more than 35%, to $139.50 in extended trading after the numbers came out." Thursday's rally drove share prices intraday up 40% to as high as $149.17, and that's when the selling (I suspect short selling) kicked in.

The article continued, "It would also mark a nearly 80% increase since the company's early December announcement of a licensing deal with Walt Disney (DIS) for exclusive streaming rights to new movies beginning in 2016."

The two-day surge in Netflix's stock has been a gigantic windfall for billionaire investor Carl Icahn. He began accumulating close to a 10% position in NFLX in early September when the stock was trading below $55. This is a big payday for Icahn!

My question involves whether the upside reaction to NFLX's earnings and Hastings' comments involves a short squeeze that will be followed by a rational program to begin to short the stock at these outrageous levels?

Yes, the two million-plus increase in new subscribers in the fourth quarter gives Netflix something close to 27.1 million U.S. subscribers for its streaming $8-per-month service.

Yes, as CEO Hastings said, he believes the U.S. streaming service eventually will have 60 million to 90 million subscribers, although the fact is he hasn't even established a timetable for reaching that goal. Hastings and the Board of Directors don't know how long it will take to win that many subscribers.

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