This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Netflix Can Multiply Profits Eightfold -- Making Today's Drop a Joke

NEW YORK (TheStreet) -- Seemingly forever, Netflix (NFLX - Get Report) has been portrayed as the overvalued, underprofitable poster child for that darn nutty Internet sector. So could the movies-on-demand giant really be about to earn $35 a share within a couple of years?

RBC Capital analyst Mark Mahaney thinks so. And that view is not as crazy as you might think.

Netflix shares are down nearly 6%, or almost $27, to about $425.20 as of 1 p.m. Tuesday. The drop follows a report of second-quarter earnings that slightly topped most estimates for both profit and subscriber growth. Net income more than doubled to $71 million, or $1.15 a share, from $29 million, or 49 cents a share, in last year's second quarter. But Netflix said third-quarter earnings would be lower than expected because it's planning to take a bigger loss in Europe to expand faster.

5 Biggest Amusement Park Chains of Summer 2014

Why For-Profit Education Institutions Should Be Sent to Detention

Fair-Trade Coffee Wins Over Starbucks, Keurig, but Fails Coffee Producers

Coca-Cola Looks to Crowdfunding to Raise Social Media Awareness

"Red is the new black," said long-time Netflix bear Michael Pachter this morning on CNBC, riffing on the title of Netflix's hit show Orange is the New Black.

But of all the discredited reasons to sell Netflix, the most discredited of all is fear of short-term losses driven by CEO Reed Hastings' decisions to put more metal on the pedal. Bears have been fooled so often by Hastings' moves that Netflix's stock chart has long resembled an inverted W -- selloffs like today's followed by booms. (Some of those "booms" look like little bumps now that the stock is above $420, but looked pretty darn big at the time.)

We have seen this movie before.

The best thing about this company has always been its ability to balance aggressiveness with building a solid foundation for profitability. This year, consensus estimates say Netflix will earn $4.12 a share, more than double last year's profit, as revenue jumps 25% to $5.5 billion. And that's with international operations that are still in startup mode on track to lose $200 million or more this year.

The question is, what does Netflix look like when its European business grows up? 

Mahaney says it looks like 100 million subscribers, paying $10 a month vs. $8 and change now, with 30% operating-profit margins (meaning, 30 cents of every dollar it collects becomes pretax profit). The math says that generates $3.6 billion in operating income, or just under $35 a share. At that rate, Netflix's valuation today is about seven times those operating earnings.

The next question, is how long will it take and how realistic are the assumptions?

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
NFLX $90.03 0.00%
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%
TSLA $240.76 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs