Up More Than 330% Since 2023, Is It Too Late to Buy Netflix Stock?

Key Points

• Netflix has achieved significant growth in just the past few years as it has expanded into new opportunities.

• As a result, the stock has surged in value and now trades at more than 60 times Netflix's trailing earnings.

• 10 stocks we like better than Netflix ›

Netflix (NASDAQ: NFLX) has continually proven its doubters wrong. It has made streaming profitable, and done so while creating plenty of its own movies and television shows. It has also gotten into gaming and live sporting events, diversifying its growth opportunities along the way. The business has been unstoppable in recent years.

Growth investors have been rewarding the company for its tremendous results. Since 2023, shares of Netflix have increased by more than 330%. The question now is whether the stock has become too expensive. Can Netflix still rise even higher, and is it a good buy today, or could it be approaching a peak?

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Netflix's valuation has ballooned significantly

There's no doubt that Netflix has performed well in recent years, but when a stock rallies so rapidly, its valuation can start to get out of control. Currently, the streaming stock is trading at over 60 times its trailing earnings. That's elevated compared to its five-year average.

NFLX PE Ratio data by YCharts. PE = price-to-earnings.

Investors have been accustomed to paying a premium for Netflix in the past, but the last time it was trading at higher levels was toward the end of 2021. The following year, high-priced growth stocks would go on to crash in what proved to be a disastrous performance in 2022 -- Netflix fell by 51% that year.

Analysts also believe the stock may have run out of room to run. The consensus price target is $1,182.58, which is lower than where shares of Netflix closed on Monday: $1,289.62.

Does Netflix's growth rate justify its high premium?

If a business is growing at a fast pace and expectations are high, it can make it easier to justify paying a significant premium for a stock. Netflix has been growing in double digits in recent quarters, but things have been slowing down noticeably of late.

NFLX Operating Revenue (Quarterly YoY Growth) data by YCharts. YoY = year-over-year.

This is arguably not the growth rate you might expect for a business that's trading at more than 60 times its earnings. The problem is that this means speculation may be playing a big role in the stock's high price today, which could make investing in the business today a risky endeavor.

Should you invest in Netflix stock today?

Netflix has been a great growth story over the years, and since 2021 it has added around $10 billion to its top line (totaling $39 billion last year). But there's no denying that the stock is incredibly expensive right now. Buying a stock that's as highly valued as Netflix is leaves virtually no margin of safety should the business struggle unexpectedly, or if its growth rate slows down further. In fact, I believe it's already overdue for a correction.

As excellent a business as Netflix is today, this is a stock I'd put on a watch list rather than invest in right now. At such a high valuation, there's simply too much downside risk, and there are many other, cheaper growth stocks to consider instead.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.