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