Netflix (NFLX) is in the Danger Zone this week. The DVD subscription and streaming video service has changed the way people watch movies and TV shows. However, its current valuation is out of touch with reasonable expectations for future cash flows and profitability.
The belief that Internet retail is or will be more profitable than traditional retail is untrue. Amazon is in a competitive, low margin business that cannot justify the profit growth implied in its valuation.
RED FLAG: The main driver of the difference between Economic and Accounting earnings is FDX’s $11.9bn of off-balance sheet debt, a big number compared to $19.7bn in Net Assets and $25.6bn of market value.
HIDDEN GEM: Our detailed valuation model shows that IBM grew its “economic” profits more than it accounting profits during its last fiscal year. Economic profits rose by $1.15bn while accounting profits rose by $1.09bn.
One of the Most Dangerous Stocks for July, Whole Foods has misleading earnings and a sky-high valuation, in our opinion. The same is true for all of our Most Dangerous Stocks.
Hidden Gem – GPS: economic earnings are rising faster than reported accounting earnings b/c the company lowered the capital employed to run the business. GAAP earnings do not capture increase capital efficiency of the business.