Much ado has been made over the recent news that streaming company Netflix Inc. (NASDAQ:NFLX) has recently breached the market capitalization of behemoth companies Walt Disney Co. (NYSE:DIS) and Comcast Corporation (NASDAQ:CMCSA). The race to become the world’s largest media company has, at least for now, seen a tremendous rise in investor enthusiasm propel Netflix to a valuation in line with these two massive media companies, perhaps eschewing in a new era for investors.
While I have argued in the past that I believe the balance sheet issues (huge capital investment need and cash burn), lack of realistic "moat" to new entrants, and potential for long-term pricing wars should new entrants look to take over market share, are issues which are likely to continue to plague Netflix over the long-haul, the increasing appetite for growth among market participants has led to a steady rise in the share prices of companies offering what investors want – a long-term growth trajectory and a realizable growth story.
The reality is that Netflix is likely to continue to grow its top line at a rate which will potentially exceed that of Disney for quite some time to come; the ability of Netflix to produce earnings growth (and quality earnings growth at that) remains to be seen, given the infancy of the industry and what I would call a lack of realistic push back from competitors. At this point in time, given the extremely elevated valuation of Netflix, I would urge investors to take a step back and consider just how much earnings growth has been priced into such equities before jumping in with both feet.
Invest wisely, my friends.
