Netflix is still an expensive stock, Don Lato says

Like the rest of the FAANG group of tech stocks, Netflix (Netflix Stock Quote, Chart NASDAQ:NFLX) has had a horrible month of October, chopping 28 per cent off its share price since October 1st. So, is Netflix now in bargain-basement territory? Not really, says Don Lato of Padlock Investment Management, who admires the business model but not the multiple.

“I think there’s a tremendous growth opportunity for the business,” says Lato, President of Padlock Investment, to BNN Bloomberg. “They’re expanding internationally more and more and it has become an item which is on most people’s monthly credit card bills, I know it’s been on mine for some time.”

“If they want to have revenue growth, all they have to do is raise the bill by a dollar a month and they’re not going to lose any subscribers. It’s a tremendous business model,” he says. “You’ve got almost-built-in price increases because it’s at their discretion when they do it and it’s not going to be noticed, and you have expanding territories as well.”

Two weeks ago, Netflix reported its third-quarter earnings, which matched analysts’ expectations on revenue at $4 billion and surpassed them on earnings, coming in at $0.89 per share compared to the Street’s $0.68 per share. (All figures in US dollars.)

The company added seven million subscribers for the quarter, as well as projecting an additional 9.4 million net subscribers over Q4.

“We’re getting a little better on the forecasting,” CEO Reed Hastings said to CNBC. “I think by focusing going forward on paid [net adds] we’ll be able to be a little more accurate and focus on the fundamentals.”

Immediately, the market reacted positively by bumping up NFLX almost ten per cent in trading, but since then the stock has sank lower. Still, as one of the market’s top performers over the first half of the year, the stock remains up 39 per cent for 2018.

But at roughly 108 times forward earnings, Lato says Netflix is hard to rationalize.

“One thing that goes against buying it as a stock is that tremendous multiple and that multiple continues to be way too high, even for that business model,” he says.