Valuation doesn’t matter; until it does. The path to being a great investor is to ignore the short-term and focus on long-term risk and reward. The markets don’t always correct immediately, but over the long-term, gravity can knock high-flying stocks out of the sky.

Netflix is in a giant bubble right now. I feel 100% confident making that assertion. The upside to owning the stock at this point is virtually nil. There’s almost a 0% chance the company could conceivably meet the market’s current valuation for it. Conversely, the downside risks are huge. In a pessimistic scenario, the stock could lose 80% – 90% of its value. Netflix is a great company. I can sing the praises of Reed Hastings all day long. As a stock, however, buying NFLX in March 2018 is insane.

How overvalued is NFLX? Even with a 50% haircut, there’s still a compelling argument that it would be extremely overvalued. NFLX is in 1990’s Tech Bubble territory. Buying Netflix in 2018 is like buying Microsoft or Oracle in 1999. If you buy-and-hold for 20 years, it’s completely possible that the 2038 stock price is the same as the 2018 stock price. That’s how big of a bubble this is.

To showcase how absurdly priced Netflix is at the current levels, let’s try to reverse engineer NFLX’s current valuation.

US Revenue Growth

As I write this article, the current NFLX stock price is at $322 and the Enterprise Value is at $148 billion. In order to value NFLX, there are two huge questions we have to answer:

(1) How many subscribers will NFLX have in 10 years?

(2) What will NFLX’s profit margins be in 10 years?

To examine the first question, let’s first look at subscriber growth. Over the past 6 years, NFLX has grown US subscribers from 23 million to 58 million. International subscribers have increased from 3 million to 63 million.

Those are impressive numbers, but where’s the saturation point? I have to assume we’re closing in on it in the US. According to the US Census Bureau, there are about 126 million households in the US. Netflix has already captured almost 50% of the American market! While NFLX had mid double-digit growth for 2017, it’s difficult to imagine this trend lasting too much longer. You can see this showcased dramatically in the chart below that projects a 10% US subscriber growth rate versus a 1% US household growth rate (in line with levels over the past decade). By 2027, with a projected 10% growth rate, NFLX’s projected subscribers would actually exceed the number of US households!

Needless to say, NFLX’s US growth will have to slow down sometime soon. There’s no realistic case where a large number of households are subscribing to NFLX twice. For US growth, it’s best to make an estimate of penetration level NFLX can achieve over the next 10 years and estimate revenues based on that. In an optimistic case, I think we could assume that eventually 80% of US households have NFLX. This would put us at about 110 million US subscribers by 2027. In a more pessimistic case, we might say 70%, which would give NFLX 98 million US subscribers. Either way, the US subscriber picture is relatively straight-forward. The bulls and bears probably aren’t that far apart on this particular assumption.

International Revenue Growth

International growth is much trickier to forecast. As the US market becomes saturated, international is clearly NFLX’s best avenue for growth, but what are the limits? The data for international households is less reliable. Based on data (some of which is outdated) on Wikipedia, I’m estimating somewhere in the realm of 1.5 billion households (outside of the US) globally.

It should immediately be noted that around 40%+ of those households are split between China and India. You can get Netflix in Bosnia-Herzegovina, but statistically speaking, with about 1 million households in Bosnia, the growth is going to be limited from these smaller countries like Bosnia, Azerbaijan, and Uruguay. Netflix is already in India, but without China, that leaves about a quarter of international households outside of NFLX’s reach. Many international markets are also going to be much more difficult for NFLX to win or obtain rights in, so we know that NFLX will never achieve an international household penetration rate anywhere close to the US rate, but predicting the “upper bound” is a tricky task.