Netflix shares have nearly doubled in price in a year. Is it time to take profits?

Shares of streaming giant Netflix have soared nearly 100% over the past 12 months, giving investors one of the best returns among companies in the S&P 500 index. But that growth has also lifted the stock's valuation, a multiple that reflects the ratio of its price to projected earnings, to a four-year high. As a result, investors face a dilemma: whether to continue betting on a further rally against the inflated valuation or to lock in profits.

Over the last three trading sessions in June, Netflix quotes closed at historic highs and only at the trading on July 1 decreased by 3.4%. Since the beginning of the year, the company's market value has risen 45%, and over the past 12 months it has nearly doubled to $550 billion, surpassing Mastercard and Exxon Mobil. Investor enthusiasm is fueled by rising ad revenue, higher subscription prices and the limited impact of duties on the company, notes Bloomberg. Another factor that spurred the rally was the dramatic expansion of the company's stock ownership: according to Bank of America data as of the end of May, nearly half (49%) of funds with long positions included its securities in their portfolios, up from just 14% in 2016. Netflix is now among the top ten most popular technology stocks among institutional investors, the agency adds.

That growth has made the streaming company one of the top earnings performers among S&P 500 members over the past year and the fourth-best performer in the Nasdaq 100 this year, Bloomberg notes. However, it also lifted Netflix's share price multiple to projected earnings to 45, the highest since 2021, when a pandemic spurred interest in online video content. By comparison, tech giant Nvidia's securities are trading at 32 and the Nasdaq 100 average is 27. Overvaluation can alert even optimistic investors - with high expectations, any weakness in reporting can cause a correction, explains Bloomberg. Netflix will release financial results for the second quarter on July 17. According to the agency's forecast, the company's revenue in 2025 will increase by 14% against growth of 16% in 2024.

Many investors are not intimidated by Netflix's high valuation, Bloomberg notes. Mahoney Asset Management CEO Ken Mahoney, for example, recognizes that the stock is expensive to pay for, but believes Netflix's dominant market position justifies it. «People often miss out on great companies by getting too hung up on valuation, and I don't see a problem with paying more for what Netflix offers,» Mahoney said as quoted by Bloomberg. He said the company is doing everything right and its growth is looking more and more like a snowball gaining mass.

Most Wall Street analysts also remain positive on Netflix's stock, noting the company's rich content calendar for the year, from NFL and boxing broadcasts to the new season of «Very Strange Things,» Bloomberg writes. In June Oppenheimer and several other investment banks raised their target price on the company's stock, noting Netflix's unique position in the global streaming market. On May 30, an Evercore ISI analyst also increased his target, while Netflix's stock was already trading at all-time highs. It cited the growth of its live-streaming business as a growth driver, and an investment bank survey showed the company leading in user satisfaction and ahead of rivals like Amazon Prime Video and Disney's Hulu. 

However, there are doubters. «Netflix has strong fundamentals, but the valuation base has changed, and it is not certain that such growth in multiples will be repeated,» says Michael Smith, senior portfolio manager at Allspring Global Investments. - I am confident in the company's potential: it manages prices competently, develops advertising and goes live. But expectations are so high right now that even a small disappointment could trigger a correction».

Most Wall Street analysts - 36 out of 52 -  advise investors to buy Netflix securities (Buy and Overweight ratings). Another 15 take a neutral stance with a Hold rating and only one recommends selling these stocks. Meanwhile, the Wall Street consensus target price is $1208 - down 6.6% from its July 1 close.

This article was AI-translated and verified by a human editor