This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Nasdaq investors had reason to be happy yesterday, as the tech-heavy index rose more than 0.7% overall. But among this happy camp, some of the very happiest were Netflix (Nasdaq: NFLX) shareholders. They enjoyed the great good fortune to be presented an initiation at "buy" -- and by one of the best tech investors in the market today.

Yes, Fools, it seems our little Motley Fool Stock Advisor recommendation has won itself yet another fan, this time in the form of Canadian tech-spert Canaccord Adams. On Wednesday, Canaccord issued a ringing endorsement of Netflix, saying, "Despite being predominately a mail-order DVD rental company today, already 25% of the company's subscribers are capable of direct video streaming to their TVs, and we expect this to explode with the rapid increase in web-enabled CE devices and brand awareness of Netflix." The more so because: "the company's subscription revenue model and underpenetrated market suggest it can ultimately be a lucrative distribution partner to the studios and other content owners going forward."

And if there's anyone who should know what the future of entertainment delivery will look like, it's Canaccord.

Let's go to the tape
You see, over the past few years that we've been tracking this analyst's performance, Canaccord has proven itself a real pro at picking stocks operating in Netflix's sector, and those adjacent to it, be they device makers ...

... or Internet vendors:

Within the Internet and Catalog Retail sector, Canaccord's batting 67% for accuracy on its picks. The analyst has the same strong record on the device makers inhabiting the Computers and Peripherals space. Be the company a pure consumer electronics play like Apple, or a more business-oriented shop like International Business Machines (NYSE: IBM), Canaccord calls it right.

With a record like this, investors have every reason to put their faith in Canaccord Adams, and follow its recommendation to buy Netflix today. So why do I think that's the last thing they should do?

One word: starts with the letter "p"
Much as I love Netflix, the company, as confident as I am that the DVD-by-mail business will generate profits for years to come, and that Netflix will play a major role in digital distribution of movies beyond that, one worry continues to nag at me: price.

You see, valuation matters, folks. And when I look at Netflix, trading for 36 times trailing earnings, and 38 times trailing free cash flow, well, the stock looks priced for a perfection that I don't believe any company can attain. Analysts who follow the stock, on average, expect Netflix to grow earnings at just under 19% per year over the next five years. And don't get me wrong -- that's great growth. I just don't think it's great enough to justify this price.

Even if you use Canaccord's valuation (the analyst argues that Netflix will hit $85 within a year, "based on 25x our 2011 non-GAAP EPS estimate of $3.28 plus cash"), it looks very aggressive. I mean, 25 times next year's earnings? For a 19% grower? And it's not even GAAP earnings we're talking about here.

Foolish takeaway
When you get right down to it, whether you value it on the profits it's already proven it can earn, or on the ones Canaccord hopes to see it earn, Netflix just plain costs too much.

Rent all the Netflix movies you like. Just don't buy the stock right now.