Netflix Is Overpriced but Apple Is On Sale

NEW YORK ( TheStreet) -- The renowned and often controversial economist John Maynard Keynes said a mouthful when he pronounced: ""Markets can remain irrational longer than you can remain solvent."

With the mania in shares of Netflix ( NFLX) going full bore after its earnings report on Wednesday it's time to reconsider that oft-forgotten quote. Whether you agree with Keynesian economics or not, if you've been an investor or trader in the stock market you can hardly disagree with it.

Shares of NFLX are up 43% in two trading sessions after the reaction to its after-market earnings announcement. This appears to be a "short squeeze" situation, and I'm reminded of one of Jesse Livermore's favorite books "Extraordinary Delusions and the Madness of the Crowd" by Charles Mackay. Traders may be chasing the stock while those who were short NFLX are covering on heavy volume.

NFLX had a surprisingly positive quarter but not enough to justify such irrational exuberance.

It's not that NFLX's earnings skyrocketed or that it is anywhere near reaching the levels of success that a company like Apple APPLE ( AAPL) has experienced for years.

When one compares NFLX, with a market cap of less than $8 billion, with a gigantic cash generator like AAPL with a market cap of nearly $434 billion, a rational investor has to wonder why AAPL shares are down while NFLX is soaring.

On a timely note, TheStreet's Jim Cramer said in an interview today that he still likes NFLX but he also sees that the price has gotten ahead of itself.

When a company like Apple can report a relatively positive quarter as it did on the same day and in after-hours trading be taken out to the woodshed, something is seriously irrational.

Today, AAPL shares traded down as low as $450.66, even though AAPL is trading at only 8 times forward (one-year) earnings. That's outrageously cheap, and at a price of even $460, its dividend yield is 2.3%.

Apple's revenue for the quarter was $54.5 billion compared to $46 billion, an increase of $8.2 billion year-over-year. AAPL has no debt and tons of cash.

As CEO Tim Cook expressed it during the company's conference call, "Turning to cash, our cash plus short-term and long-term marketable securities totaled $137.1 billion at the end of the December quarter compared to a $121 billion at the end of the September quarter, a sequential increase of almost $16 billion."

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

If you want some explosive facts that speak to how bright Apple's future is and how valuable a company it is, just take a look at this remarkable video, compliments of Bloomberg. If you're a serious investor or looking for a stock that's just plain undervalued, watch it twice.

Lest you think I'm digressing, let me jump right on to the main topic concerning Netflix. If you think this company (and I speak as a subscriber) is worth 99 times its forward (one-year) earnings, I have a bridge I want to sell you.

In watching the action it seemed like those who were betting big against NFLX were buying to cover their short positions, and that carried over into Thursday's trading session. These are the classic symptoms of a massive short squeeze.

Yes, NFLX has attracted over two million new subscribers, and it posted a profit of 13 cents a share. The Street had been looking for a net loss. So that and the other details was supposedly enough to cause after-hours trading of the stock to rise almost 36% after going up 5.57% during regular trading on Wednesday? Give me a break!

An Associated Press article on Wednesday described the earnings report and the market reaction this way:
The results announced Wednesday served as a resounding endorsement of Netflix CEO Reed Hastings, who has been spending heavily to license more compelling movies and TV shows in hopes of warding off intensifying competitive threats.
Companies such as Amazon.com (AMZN) and Coinstar's (CSTR) Redbox have expanded into streaming video to Internet-connected devices to compete with Netflix.

In respect to Hastings' strategy, it's been met with understandable skepticism and yet it has done quite well. But did it really pay off that much during the final three months of last year? This is starting to smell like deja vu all over again!

Remember the overpriced high-flyers from the recent past like First Solar ( FSLR) and Chipotle Mexican Grill ( CMG)? We know what happened after they went ballistic.

When I warned about them being overpriced, many commented that I didn't understand. Oh, but I do understand why companies become overpriced and how lucrative shorting operations can set the stage for a massive price run-up followed by a big fall.

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.

"We have a long way to go, but we are very happy with the quarter," Hastings said in an interview Wednesday. That quote may be the biggest clue yet as to how overpriced and overvalued NFLX shares truly are. It's like counting your chickens before they hatch!

When the giddy euphoria and celebration cools down, my guess is that a big shorting effort on NFLX shares will commence. Then shares will go down low enough that the Relative Strength Indicator will signal that shares are oversold, and as sure as clock work, investors will drive the stock back up again.

My best suggestion is to stand aside if you don't already own shares of NFLX until the stock drops back down to earth. Let the share price bring the forward PE ratio down to a "modest" 44 times earnings and perhaps you'll be able to buy shares for $75 or less.

Be a rational, logical and patient investor. Chances are if you're prudent you'll come out ahead in the long run without having to take wild-eyed risks. Spend your efforts evaluating oversold companies like Apple, and do your research to find the next Netflix opportunity before it blasts off into outer space.

At the time of publication the author had a position in AAPL and is waiting for the price to come down on NFLX before buying.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Jim Cramer's protege Dave Peltier finds you Stocks Under $10 picks with explosive upside potential. See what he's trading today with a 14-day FREE pass.