Netflix’s lofty valuation has even bullish investors nervous

Netflix investors face a dilemma: Continue to bet on a stock that has delivered best-in-class returns over the past year or reconsider shares that increasingly look like they’re priced for perfection.

The streaming giant’s stock price has nearly doubled over the last 12 months amid growth from advertising sales, subscription price increases and limited exposure to tariffs. While that makes it one of the best performing S&P 500 members over that span, it’s also boosted its valuation to 45 times expected earnings for the next year. In comparison, Nvidia Corp. is priced at 32 times while the Nasdaq 100 is at 27 times.

Such a premium valuation, Netflix’s highest since 2021 - when its growth was being supercharged by the pandemic - is making even bullish investors wary of a potential sell off. Second-quarter earnings are due on July 17.

“I feel really good about its fundamentals, in terms of its pricing power, ad business and move into live events, but expectations have gotten to the point that any disappointment would be a risk,” said Michael Smith, senior portfolio manager and head of growth equity at Allspring Global Investments.

After tumbling in 2022 amid slumping subscriber growth, Netflix shares have roared back as the company cracked down on password sharing and turned to advertising to boost revenue. Meanwhile, live events like WWE Raw are helping attract new subscribers. Netflix is the fourth best-performing stock in the Nasdaq 100 this year and now boasts a market value of $570 billion (R10 trillion), bigger than Mastercard and Exxon Mobil.

Netflix’s revenue is expected to rise 14% in 2025, down from 16% growth in 2024, according to the average of analyst estimates compiled by Bloomberg. While that’s a vast improvement from 2022, when revenue rose by about 6.5%, it pales in comparison to 2020 and 2021, when Netflix’s sales jumped 24% and 19%, respectively, as pandemic era lockdowns sent subscriber growth soaring.

Still, most analysts on Wall Street remain bullish on the stock with a slate of programming this year that includes NFL games, boxing and new seasons of the popular shows Squid Game and Stranger Things. Last month, Oppenheimer & Co. described Netflix’s outlook as “ironclad” and raised the price target on the stock, one of many to do so in June.

However, the shares have risen faster than analysts have upped their projections, leaving Netflix trading roughly 10% above the average price target of $1 217, suggesting limited upside potential over the coming months.

Plenty of investors are undeterred by Netflix’s valuation. Ken Mahoney, the CEO of Mahoney Asset Management, acknowledges it’s a steep price to pay but believes Netflix’s market dominance justifies the premium.

“People often miss great companies because they worry about valuation, and I don’t have a problem spending up for what Netflix offers,” Mahoney said. Netflix is “doing all the right things and is like a snowball getting bigger as it rolls downhill.”

Another factor that’s helped power Netflix’s rally is that the stock has become much more widely owned. According to Bank of America data published at the end of May, Netflix was owned by 49% of long-only funds, making it the ninth-most-widely-held technology stock. About 14% of such funds held the stock in early 2016.

Despite all of the tailwinds in Netflix’s favor, Allspring Global’s Smith questions what will be the next driver of Netflix’s rally given the high valuation.

“There is a lot of fundamental momentum at Netflix, but the valuation backdrop has changed, and it is hard to say that this kind of multiple expansion is repeatable,” Smith said.

BLOOMBERG