Netflix, Amazon Perform But Aren’t Most Profitable
Posted: November 03, 2015
Of the 500 stocks in the Standard & Poor’s 500 Index, Netflix Inc. and Amazon.com Inc. are the best performers this year.
In the 43 weeks through Oct. 30, Netflix (NFLX) was up 117 percent and Amazon, (AMZN) 103 percent.
Trailing them in the performance derby, but still doing great, were Activision Blizzard Inc. (ATVI), up 72.7 percent; Expedia Inc. (EXPE), up 58.9 percent; and Cablevision Systems (CVC), up 57 percent.
How many of these stocks would I buy? Nary a one.
Netflix
I’m an avid user of Net-flix, as are about 43 million other people in the United States and 26 million or so abroad. It’s a terrific and convenient delivery service for TV shows and films, and a good value for consumers. Trouble is, profits for Netflix have been slender. The company has made a profit in each of the past 11 years but never more than 62 cents a share, which was last year’s figure.
Let’s say an exciting, growing company like Netflix should sell for a high multiple of earnings — 30 times earnings, perhaps. At that ratio, the shares would command a price of $18.60 a share. The actual stock price, however, is about $108 a share, making the stock grossly overvalued in my opinion.
One other problem: No Wall Street analyst expects Netflix to make as much as 62 cents a share this year, and few expect it in 2016, either.
Amazon
Amazon has revolutionized retailing in the United States. Today, consumers need hardly ever go to a store if they don’t want to. They can order everything online and have it delivered to their door. But being a pioneer does not necessarily make a company profitable. Autos, radio and television were revolutionary products, yet many early car companies and broadcasters went broke.
Amazon has lost money in two of the past three years. At nearly $626 a share, this is a cult stock. It sells for 112 times analysts’ best guess on 2016 earnings and more than 23 times book value (corporate net worth per share).
Activision Blizzard
I’ve liked Activision Blizzard, a video game company based in Santa Monica, Calif., at times in the past. But I like it when it’s out of favor. It is now in favor. The stock sells for 27 times recent earnings, and 20 of the 21 analysts who follow it rate it a “buy.”
Paradoxically, such unanimity of analytic opinion is a bad sign. For many years, I’ve written an article each January tracing the fate of stock most beloved by Wall Street. On average, they have underperformed the S&P 500 by almost four percentage points.
Expedia Inc.
Expedia, based in Bellevue, Wash., is a huge online travel agency. One thing I don’t like here is that the debt-to-equity ratio has been rising steadily in recently years, and now debt is almost equal to equity. Analysts expect Expedia to earn $6.14 a share next year, up from an estimated $4.29 a share this year. If they’re right, the stock may do well.
But I’m not buying a ticket, and I won’t be onboard.
Cablevision Systems
I hated Cablevision for a long time. Its revenue has been growing at only a 0.5 percent annual rate the past three years. It had $9.6 billion in outstanding debt. Its book value, or corporate net worth, was negative $17.94 a share.
All that didn’t prevent Altice, based in The Netherlands, from offering $34.90 a share in cash for the company. That accounts for much of this year’s gain in Cablevision shares, but at this point, only an arbitrage profit is left, as the shares are selling for $32.59, or $2.31 below the offer price.
A look back
A year ago, I looked at the five best performers in the S&P 500 through Oct. 30, just as I did in this column. I said I would avoid four of them and buy only Southwest Airlines Co. (LUV). Southwest gained 27.9 percent. from Nov. 4, 2014, through Oct. 30. The other four gained only 3 percent, trailing the S&P 500 at 5.51 percent
Electronic Arts Inc. (EA) and Edwards Lifesciences Corp. (EW) were big gainers, but Keurig Green Mountain Inc. (GMCR) and Mallinckrodt Plc (MNK) had offsetting losses.
Bear in mind that the performance of my column selections should never be confused with that of actual accounts I manage for clients. My column picks are theoretical and don’t reflect actual trades, trading costs or taxes. And of course, past performance doesn’t predict future results.