[scotch_drinker]

I think the most important part of the article is the quote at then end saying that just because they aren't interested in buying it doesn't make it a good short. The market can stay irrational longer than you can stay solvent and all that.

75x trailing earnings in the current economic environments SEEMS expensive to me. I'd be willing to bet (but not with real money) that it will be cheaper in 12 months. Of course, as a Netflix subscriber, I'm glad the streaming side of things is going so well.

[jordanb]

This is one of the most important things that those "if you're so sure Apple/Gold/etc is overvalued why don't you short it?" people ignore.

Maintaining a short position is expensive. And even if you can afford it, holding it for too long can kill any upside you get when it finally does collapse. I can say that Gold is overvalued but I won't short it, and be perfectly consistent in saying that, because I admit that I have no idea how long it'll take for the bubble to pop.

[aspiringsensei]

>Maintaining a short position is expensive

Short positions on companies like Netflix should be initiated using capped-loss derivatives instead of assuming the unlimited risk of selling the company's stock short.

Buying a long-dated put option is often the best way to short something, assuming you have conviction.

[3am]

If you assume 30% growth for 5 years, dropping to 8% after that with a discount rate of 11%, then the $3 EPS implies a price target of $260. DCF derived targets imply some crazy valuations in high growth situations...

That said I wouldn't buy NFLX either. But I wouldn't want to be short when 1/3 of the float is. If AMZN buys them out that would be the mother of all squeezes.

[nrao123]

A substantial part of your $260 valuation Comes from Terminal Value (I.e. Post 5 yrs) And a 8% perpetual growth rate is an extremely aggressive rate.

Basically, to justify the current value, The 5 year CAGR has to be way, way higher than 30%

[3am]

You're right of course - I really wanted to demonstrate that P/E ratios are a function of future growth and that a stock with a very high P/E can be underpriced.

I still know some people that think a company with a $4 share price is 'cheap' regardless of earnings, cash flow, or book value (and conversely, that high price stocks like AAPL or GOOG are 'expensive'). Not saying that is the case here, but there are plenty of people that make a similar mistake comparing P/E without considering growth rates.

Yes, I know low P/E strategies do well, and margins of safety, danger or trying to model growth rates more than a couple years out... but I'm not trying to turn HN into an investing forum :)

Thank you for calling me out on that!

[borism]

75x trailing earnings in the current economic environments SEEMS expensive to me.

It seems the same to me as well, but markets seem to disagree. The riskier the bet, the more willing today's market seems to be willing to accept it.

[wiredfool]

Netflix seemed expensive to me in the $120+/share range. Even in the $100/share range, it wasn't where I was going to buy.

The market isn't rational, and it's going to be irrational with a lot more force than I can muster.