Friday, October 1, 2010

Netflix (NFLX) Downgraded; In a Related Note Hell Freezes Over

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After a series of upgrades the past few weeks [Sep 20: Analysts Starting to Get Silly] to Netflix (NFLX) - many of which had no way to justify their ever increasing price targets even as they lowered EPS estimates (showing analysts are no different than your run of the mill momo daytrader investor waving his Etrade account in the air), someone finally stood up and said "this is getting egregious" and downgraded the stock on valuation.   Thousands of Yahoo message board posters will immediately be spending some hours devoted to sending hate mail to said Marianne Wolk declaring "what do you know about stocks! Just because it was up 30% in September does not mean it cannot keep going up 30% per month indefinitely. Bernanke promised!"

Via Barron's:

  • Susquehanna Financial analyst Marianne Wolk this morning cut her rating onNetflix (NFLX) to Sell from Neutral, noting that the stock is now about 26% ahead of her valuation target, raised 20% seven weeks ago to $120. At 44x pro forma forward EPS, she notes that the stock is trading at its highest P/E in five years, at a 34% premium to peer Internet stocks.
  • “Our downgrade is not a statement regarding the current quarterly outlook, but simply [a reflection of the fact] that the risk/reward has gotten out of balance,” she writes. “Our $120 target already reflects an extremely positive long-term outlook for Netflix in the digital video market
  • We assume Netflix will exceed 25 million subscribers by year-end 2011 and 30 million by year-end 2012, up sharply from 15 million in June and on part with major premium cable channels like Showtime. Moreover, we assume 75% of subscribers are digital by year-end 2011 and 95% by 2012…Finally, we assume NFLX successfully offsets rising streaming costs with lower DVD shipments and fees to to maintain adjusted EBITA margins near 15%. These forecasts assume near=perfect execution.”
  • Adds Wolk: “After a spate of really good news, it is hard to imagine what is left in the way of potential positive catalysts.” In particular, she notes that while the company could be a good strategic for a number of companies, the high valuation makes an acquisition of the company unlikely.

Of course, true to form by the momo analysts - another one came out today and upgraded the stock saying (I paraphrase) "valuation is for the birds".
  • Piper Jaffray maintained its overweight rating but raised the price target from $156 to $180.

According to unsubstantiated reports, NFLX Yahoo message board posters (in between board posts of "at least this analyst has a brain!") are pitching in for an all expense paid trip to Paris for "the nameless smart analyst at Piper Jaffray".


Technically, hey the stock is down $20 from yesterday's peak - might need to restart the position at this "cheap" valuation. ;)

Disclosure: I sold my NFLX yesterday morning at the open, so I can now mock the spectacle; no personal position but I shall be long soon enough and laud "smart analysts" who only upgrade


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