Is Netflix stock overpriced?

Netflix (Netflix Stock Quote, Chart, News NASDAQ:NFLX) may be raking in subscribers during the COVID-19 lockdown but the stock is too pricey, says Stan Wong of Scotia Wealth Management, who claims the numbers don’t add up at the moment.

“This name has been very strong, obviously, as it has benefited from people staying at home and the work-from-home phenomenon, but the valuation has always been a bit of an issue for me with Netflix,” says Wong, director of wealth management at Scotia, who spoke to BNN Bloomberg on Tuesday.

“Out of the FAANG stocks it’s not one of the names that I’ve owned in the past. The valuation is trading at about 61x on a forward basis with a 32-per-cent growth rate expected. So, slightly expensive at this point at 2.0x PEG ratio,” Wong said.

All of the FAANG stocks have done well over the past couple of months, with Google being the one stock out of the group —which also includes Facebook, Apple and Amazon— that’s still below its pre-pandemic share price.

E-commerce giant Amazon has benefited from the stay-at-home culture, obviously, as has Facebook, which saw a smaller-than-expected drop in ad revenue in its last quarter. And investors continue to like Apple, even as the iPhone maker’s revenue growth has slowed due to the coronavirus’ economic impact.

For Netflix, the company last reported earnings in late April —and thus caught only a month or less of COVID-19’s full impact in countries such as the United States and Canada— but subscriber numbers were up substantially, growing by 15.8 million globally where analysts had been expecting growth of on average 8.2 million additions.

The company hit $5.77 billion in revenue for its first quarter 2020 and earnings of $1.57 per share, which compared to analysts’ estimates at $5.76 billion and $1.65 per share, respectively. Worries arose about Netflix’s ability to provide new content while studios remain shuttered during the pandemic, but management has said it’s cache of new programming is still large.

And while the health crisis has naturally dominated headlines of late, it was only a few months ago when the scuttlebutt on Netflix was all about the streaming wars and the onset of greater competition from the likes of Disney, Apple and HBO.

That battle is still being waged but Wong says the impact on Netflix’s bottom line may yet be felt.

“They’re drawing in a lot of subscribers, particularly during this pandemic. But the one thing to consider is that there’s lots of competition surrounding them,” Wong said. “They’ve got Amazon, you’ve got Disney+ and there are only so many dollars to go around.”

“Right now, I’m a bit neutral on the stock,” he said. “I think that if we see a more significant pullback I’ll start considering this name. Right now, it’s trading right at the 50-day moving average. I’d like to see it get down the 200-day moving average, which is closer to the $340, $350 level, to think of it as more of a bargain.”