[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!