As we near the top of the economic cycle, one has to wonder when the next bear market will hit the economy. Unemployment is at a 9-year low. GDP growth is finally breaking through 3%. Seems to be healthy economically speaking, but that is also reflected in current market valuations, which are near higher than normal. If interest rates begin to step up, in any real sense, we could face a bear market in equities, or worse, a recession.  That's the cycle.

That brings me to Netflix (NFLX), which someone recently asked me about as an investor. It's been over a year since Carl Icahn exited his Netflix position booking a nice profit of $1.6 billion. When a billionaire like Icahn cashes out, I notice. The easiest to notice about the stock, and most obvious red flag, is the valuation. The stock trades at a Price to Earnings (PE) multiple of 322. Looking forward at future earnings, the figure is 125 time earnings. 

Flip the PE ratio and express this as an earnings yield. You will see that the return on investment is less than 1% per year, expressed as an earnings yield. It's clear that investors don't care about this earnings figure and they are more concerned with some earnings number that is ten or twenty years in the future. In other words, the investors in this company aren't valuing the business based on today's operations. 

That creates a lot of risk. My friend that recommended Netflix to me said something about the great original content. Sure. Netflix has great content. That's how they got the current subscriber base.  However, the internet is filled with new and interesting content. Just look at YouTube, Amazon Prime, Hulu, or any number of other startups breaking into this space. For creating new content, there are no barriers to entry. Yes. That's what I said. Content creation has no barriers to entry, except your imagination, of course. 

So, what's the justification for a PE multiple of 322? There is none.