What Are Wall Street's Netflix Analysts Up to Now?

Do you think Netflix analysts on Wall Street are just interested in predicting the company's performance? If so, think again!

Jan 15, 2014 at 5:05PM

2014 is still young, but Netflix (NASDAQ:NFLX) analysts on Wall Street have been busy in the last two weeks. Unfortunately, that doesn't mean that they've been giving investors much helpful information.

Two recent analyst moves, by Richard Tullo of Albert Fried & Company and Scott Devitt of Morgan Stanley, show why investors should be wary of relying on Wall Street brokerages for investing insights. Both analyst moves had little or nothing to do with changes in Netflix's prospects -- which is the only thing that matters for long-term investors.

Walking away
On Dec. 31, longtime Netflix bear Richard Tullo decided that his New Year's resolution would be to stop covering Netflix! Tullo has been adamant in his negative view on Netflix; even in late October, when the stock was soaring toward $400, Tullo retained a $122 price target. (That represented his prediction for where the stock would be a year later.)

Tullo has repeatedly argued that Netflix will be unable to support its rising content costs over the long term. He also thinks investors are ignoring the threat from other streaming video services like Hulu, Amazon.com's Prime Instant Video, and Time Warner's HBO GO. However, Tullo apparently got tired of losing to the market, stating, "I am dropping NFLX because for me the shares are a waste of time and my mistake is covering NFLX."

While Tullo's frustration is understandable, it's hard to justify dropping coverage of a stock just because you don't like how it's performing. Tullo would have served his clients better by trying to understand why the stock rose so much in spite of his concerns. If he still felt confident in his original analysis after doing so, then he should have stuck with his bearish call.

A little late to the party
Analysts at Morgan Stanley offered their own strange take on Netflix last week. Scott Devitt and his team downgraded Netflix to "underweight" and set a $310 price target, arguing (like Tullo) that competition from Amazon, Hulu, and HBO GO will cut into Netflix's growth.

Taken alone, this argument makes a lot of sense. I spent much of 2013 urging investors not to underestimate the threat from Amazon and to recognize that Netflix is approaching a point where saturation will lead to slower domestic growth.

However, the timing of Morgan Stanley's bearish move is odd. Amazon made some big moves to acquire high-quality content during 2013, but most of those occurred in the first half of the year. For example, on Feb. 1, Amazon announced that it would be the exclusive streaming home of the popular period drama Downton Abbey.

Less than two weeks later, it announced that it would be streaming new episodes of Under the Dome just four days after their initial broadcast. Finally, in June, Amazon said that it had won streaming rights for popular Viacom children's shows including Dora the Explorer and SpongeBob SquarePants. These shows had been available on Netflix until just a few days earlier.

In spite of this threat that has been growing for at least a year, Devitt and his team were bullish on Netflix as recently as September. What's changed since then? It's true that valuation had something to do with Morgan Stanley leaving the bull camp; by the time of the recent downgrade, Netflix was trading at $360. However, Netflix had been priced around that level (or higher) since late November!

NFLX Chart

Netflix 3-Month Price Chart, data by YCharts.

The most plausible explanation for the delayed downgrade is that the Morgan Stanley team was afraid of fighting a momentum-fueled rally. Rather than raise their concerns about Netflix while the stock was in a dizzying upward spiral, they chose to wait until the rally fizzled -- Netflix stock had fallen about 5% in the two weeks before they downgraded it.

Focus on what matters
It's easy for individual investors to become thoroughly confused by trying to follow advice from Wall Street analysts. Yet while a Wall Street analyst's job description seems clear -- predict how certain stocks will perform -- in practice it's not that straightforward.

The extreme volatility of Netflix stock has encouraged Netflix analysts to lose track of the long-term picture. In the last two weeks alone, one analyst has stopped covering Netflix after getting fed up with the stock, while another downgraded the stock based on developments that occurred nearly a year ago. Long-term investors would be better off tuning out this Wall Street noise and focusing on Netflix's fundamentals and long-run prospects.

Patient investors win!
It's no secret that investors tend to be impatient with the market. Wall Street brokers get rich by encouraging this behavior! However, the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Fool contributor Adam Levine-Weinberg is short shares of Amazon.com and Netflix. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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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."

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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." 

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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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