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 ...
With the advent of Internet streaming, pioneer DVD-by-mail company Netflix (Nasdaq: NFLX) has finally grown into its moniker, delivering flicks over the Net. But even as Netflix launches a double-edged attack on the Blockbuster (NYSE: BBI) business model, its shares were foiled by a triple-downgrade last week.

On Friday, Netflix got hit by twin downgrades to "neutral." According to Wall Street banker Merriman, the stock's gotten a bit ahead of itself and "any potential upside in the next few years is [already] priced into NFLX shares." Rather than wait for Netflix to grow into its valuation, Merriman suggests you move some cash to rival DVD-by-vending machine company Coinstar (Nasdaq: CSTR).

In contrast -- sort of -- is Citigroup. While also neutral on Netflix now, Citi says this is purely a valuation call, as the stock's rise has made the risk-reward calculation "less compelling." Projecting "sustainable 30% EPS growth" for the company, Citi sees every reason for Netflix to retain its current valuation of 30 times earnings. Result: If the shares should suffer any sort of "material pullback" (like, say, an 8% drop based on a copula downgrades?), Citi would jump right back on the Netflix bandwagon.

The first shall be last
Most interesting of all, though, is the downgrade that sparked the sell-off. Before Merriman and Citi, there was UBS, which on Thursday declared Netflix overvalued at $110, and priced to include "a premium for [a rumored acquisition by Amazon.com (Nasdaq: AMZN)] that we do not believe will occur in the medium term." And lest anyone object that Amazon isn't the only big fish interested in dining on Netflix, UBS went a step further and crossed Microsoft (Nasdaq: MSFT) off the potential-acquirers list, noting that Mr. Softy is not known for his penchant to play well with others, and would probably balk at Netflix's permitting Sony to stream its movies through that company's gaming consoles.

Result: UBS not only cut its rating on Netflix, it dropped the stock to "sell" -- lower than either Merriman or Citi was prepared to go. And you know the worst part? Of the three bankers named above, UBS is by far the best of the bunch.

Let's go to the tape
Ranked among the top 10% of investors we track, UBS stands head and shoulders above both Citigroup (80th percentile) and Merriman (60th). UBS may not have a particularly long record picking stocks in the Internet and Catalog Retail space, but its sole pick in the sector -- Amazon -- has outperformed the S&P 500 quite handily since UBS picked it last summer. UBS also has a respectable 58% record for accuracy among Specialty Retailers, including several names which, I'd wager, share a sizable portion of Netflix's target demographic:

For Netflix shareholders, these numbers look nothing short of ominous.

From fan to foe
I admire Netflix. I'm a fan. When the company began shipping "free streaming" discs for the Nintendo Wii last month, I was first in line to grab a copy, and I'm thrilled with the result. TD AMERITRADE gave me the Wii for free when I opened a brokerage account with it and this has been a win-win-win proposition: AMERITRADE got a customer, I got a Wii, and Netflix got me to sign up for its service for the long term, because I'm now well and truly addicted to the convenience and quality of its streaming service.

Last and most important, as an investor and a customer, I see Netflix's streaming service as a real game-changer, one that will persuade erstwhile casual subscribers like myself to remain permanent customers, decreasing Netflix's churn rate and maximizing its profits. I was so impressed, in fact, that I briefly considered buying the stock -- until I saw the price.

Valuation matters
You see, according to Citi, Netflix is a buy based on its 29-times earnings multiple, and 30% growth rate. But here's the problem with Citi's logic: The 29 multiple it cites refers to the company's forward earnings -- next year, even, which hasn't happened yet. And the 30% growth it cites is only projected for next year. Longer term, the Wall Street consensus is that Netflix will grow at "only" 22%.

In other words, buying Netflix today requires that you believe 45 times trailing earnings (and 45 times free cash flow) is a fair price to pay for a 22% long-term grower. Simply put, I do not. I think it's horribly expensive. Impressed as I am with Netflix's business model, and delighted as I am with the service, there are some prices I will not pay. Some stocks I will not buy, regardless of quality. Sadly, after a huge run-up, Netflix is now one of them.

So forget about Netflix. But is there ever such a thing as a growth stock selling for an attractive price? There is. There are. They're here.