Imagine the scenario in which Netflix reached the point it could not grow anymore, and simply decided to return all earnings to shareholders in the form of a dividend. As a studious investor, you know that you could comfortably purchase a 10 year treasury and receive 2.95% per year.
Since the treasury is essentially risk free (in terms of getting your principal back as well as interest payments) then you would certainly expect to be able to earn more buying shares of NFLX.
So in this hypothetical example, you expect to earn at minimum $29.50 a year for a $1,000 investment (2.95% current 10 year treasury rate). At current prices of $390/share that means NFLX would need to have earnings per share of at least $11.50.
At this rate a $1,000 investment in NFLX would give you 2.56 shares which if all earnings returned would be equal to $29.50 (2.56*11.50).
Thus the question I have is how the hell does Netflix grow its earnings to $11.50/share? That would be the minimum amount to justify a return equivalent to a 10 year treasury. Given the inherent risk, the current share price implies that Netflix should be able to achieve earnings that well surpass $11.50/share.
Current EPS Projection for 2018 is $2.88, 2019 is $4.69, 2020 is $6.83, 2021 is $10.12.
This same modeling technique can be applied to other tech stocks and result in the same conclusion. It literally feels that this is all momentum buying and the moment one of these companies misses an earnings forecast there will be a major momentum shift and these valuations will come crumbling down.
Would anybody like to give a reasonable argument with real financials on why they feel the current price is justified without using generic qualitative statements like (everybody uses it, they have serious subscriber growth, they're the new cable etc...)?
Submitted June 14, 2018 at 12:33PM by coloradoclimber878 https://ift.tt/2Msgnmz
