After Twitter, a Dose of Realism for Netflix in 2014

After Twitter, Morgan Stanley downgrades Netflix.

Jan 7, 2014 at 7:00PM


Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Stocks achieved their first up day of 2014 on Thursday, as the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) both rose 0.6% on Tuesday.

Morgan Stanley downgraded Twitter (NYSE:TWTR) on Monday and it took aim at another tech darling today, downgrading Netflix (NASDAQ:NFLX) to "underweight" (analyst jargon for "sell"), which caused the stock to fall nearly 6%. Shares of Netflix quadrupled last year, making them the best-performing shares in the S&P 500 and the Nasdaq-100. After a run like that, it makes sense for analysts to revisit their assumptions and outlook -- investors ought to be doing the same.

Indeed, that remains a useful exercise; even after today's decline, the stock is valued at over a hundred times the next 12 months' earnings-per-share estimate. That advice goes double for Twitter, which won't even have (positive) forward earnings for some time yet, but sports a market capitalization equal to 34 times the next 12 months' revenue estimate.

But while Twitter quickly looks like an open-and-shut case of overvaluation, Netflix is more intriguing. Morgan Stanley's concern is that the streaming video service faces increasing competition from the likes of Amazon Prime Instant Video, HBO Go, and Hulu Plus, which could put pressure on U.S. subscriber growth and raise the cost of acquiring new content.

Furthermore, the analysts believe that "the market is starting to price in more than 60 million domestic subscriptions over the long term, which we think is a stretch." The midpoint of Netflix's guidance range for the fourth quarter for total members is 33.1 million. Morgan Stanley now expects 5.2 million net additions this year, down from 5.5 million previously, and they seem to suggest that even their new estimate is aggressive, writing:

Even if Netflix's churn levels fall to record lows, we estimate that over 48MM out of 92MM residential broadband households (~53%) would need to watch Netflix over the next 12 months to meet our 2014E domestic sub forecast of 39MM.

As a subscriber to Netflix, Hulu Plus, and, most recently, Amazon Prime Instant Video, I can attest that the latter represents a genuine competitive threat because of its selection and the coupling with two-day shipping from Hulu Plus, on the other hand, looks to me like more of a niche product for TV junkies, with a user experience that is much less enjoyable than Netflix. (For the same price, your viewing is interrupted by ads!)

For Netflix investors, is it "time to take some chips off the table," in the words of Carl Icahn, who sold more than half his Netflix position in October? The stock is almost certainly overvalued -- CEO Reed Hastings said as much when the company announced its third-quarter earnings in October, with the stock near its current price.

That need not be a concern for shareholders, assuming they have already achieved a significant return on the shares and they expect to hold them for several years longer (at least five, preferably.) If, on the other hand, you're just getting into the shares now, hoping that last year's momentum will persist in 2014, you may want to re-examine your goal and your assumptions.

Netflix has already made some investors rich; here's the one stock to own in 2014
There's a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Fool contributor Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on Twitter: @longrunreturns. The Motley Fool recommends Netflix and Twitter and owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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