Is Netflix's Stock Overvalued Or Undervalued?

Netflix NFLX shares have outperformed the S&P 500 in 2021, generating a year-to-date total return of 25.9%.

But after gaining 114.6% in the past three years, investors may be wondering if there’s any value left in Netflix stock.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is at about 29, nearly double its long-term average of 15.9.

Netflix's PE is 62.4, more than double the S&P 500 average as a whole. However, Netflix's PE ratio is also down 81.7% over the past five years, suggesting the stock is priced at the low end of its historical valuation range.

Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.6. Netflix's forward earnings multiple of 51.9 is still more than double the S&P 500’s, making Netflix's stock look overvalued.

Netflix’s forward PE ratio is also more than double its communication services sector peers, which are averaging a 21.3 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 0.9; Netflix’s PEG is 1.47, suggesting Netflix is significantly overvalued after accounting for its growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.15, well above its long-term average of 1.62. Netflix’s PS ratio is 10.2, more than three times the S&P 500 average as a whole.

Finally, Wall Street analysts see little value in Netflix stock over the next 12 months. The average analyst price target among the 41 analysts covering Netflix is $705, suggesting 4.1% upside from current levels.

The Verdict: At its current price, Netflix stock appears to be overvalued based on a sampling of common fundamental valuation metrics.