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Why Netflix, Inc. Slumped This Morning

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While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Netflix, (NASDAQ: NFLX  ) fell 4% this morning after Morgan Stanley downgraded the video-streaming service giant from equal weight to underweight.

So what: Along with the downgrade, analyst Benjamin Swinburne lowered his price target to $310 (from $333), representing 14% worth of downside to yesterday's close. While momentum traders might be attracted to the stock's awesome run over the past year, Swinburne believes that increased competition from the likes of Amazon Prime Instant Video, HBO Go, and Hulu Plus could start weighing more heavily on Netflix's growth.

Now what: According to Morgan Stanley, Wall Street's long-term U.S. subscription forecasts for Netflix are at risk. "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," it noted. "If monthly churn is closer Netflix's long-term average of ~4%, the number of households would need to reach ~52MM (~57%)." When you couple those competitive headwinds with the stock's forward P/E of 90, waiting for a wider margin of safety certainly seems prudent. 

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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On January 07, 2014, at 10:27 AM, LADJ wrote:

    Morgan Stanley analyst 12-month target was already 10% below NFLX share price as of yesterday. He dropped his target another $23 based on exactly zero news. "Increased Competition"? How have any of the competitors increased their competitiveness? We've seen this stock sandbagged again and again going into earnings. Nice buy on the dip opportunity.

  • Report this Comment On January 07, 2014, at 10:54 AM, hawkise wrote:

    I want to thank Morgan Stanley for assisting in an entry point for short term and for Wall Street in often overreaching

  • Report this Comment On January 07, 2014, at 3:14 PM, mberk007 wrote:

    Sell side analysts are like a heard of sheep. Wait for the rest of them to read the MS report and reconsider their own estimates before you jump in. This one down day is not going to give you much of a margin for error given the current valuation.

  • Report this Comment On January 07, 2014, at 3:35 PM, Scoobrs wrote:

    As long as it requires HBO cable service, there's only one thing to say about HBO GO.

    Just search YouTube for "The Secret of HBO Go."

    Don't fool yourself. If Netflix has real competitors today, they are video games, professional sports, and piracy sites.

  • Report this Comment On January 10, 2014, at 1:06 PM, mberk007 wrote:

    Getting there! Another 130 points down from here and there could be some value in NFLX. Even with an optomistic earnings estimate for next year, 55X P/E seems like a lot to pay for a stock with no moat.

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Brian Pacampara

I take a look at big 10% moves, as well as stock-shaking analyst calls, on a daily basis for The Fool. While I don't believe in active trading, closely monitoring Mr. Market's mood swings can help identify long-term opportunities.

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9/1/2015 10:18 AM
NFLX $107.89 Down -7.14 -6.21%
Netflix CAPS Rating: ***