Where Are All the Netflix, Inc. Bulls Now?

In less than a month, Netflix, (NASDAQ: NFLX  ) has gone from rocket stock to free-falling basket case. After soaring to a new all-time high of $458 in early March, Netflix stock has dropped by more than 20%, closing at $352.03 on Monday.

NFLX Chart

Netflix 1-year stock chart. Source: YCharts.

For most of March, Netflix shares were in a steady but slow retreat. In the last week and a half, that retreat turned to a rout, driving Netflix stock from more than $420 to around $350. Netflix's sudden and sharp pullback has been helped along by some key news stories. These suggested that companies including Comcast (NASDAQ: CMCSA  ) , Apple (NASDAQ: AAPL  ) , and Amazon.com (NASDAQ: AMZN  ) were preparing new streaming video services.

None of these reports appears to be particularly credible. However, these rumors have discredited the idea that Netflix will maintain a virtual monopoly on streaming video in the long run. As a result, bullish analysts who were promoting Netflix stock as it soared past $400 just one month ago have gone silent even as the stock has become significantly cheaper.

Not too long ago...
If we look back just a month or so, many bullish Netflix analysts were telling their clients to keep buying Netflix stock even as it soared past $450. Analysts at Needham & Company raised their price target to $525 in late February and opined that Netflix got a great deal from Comcast for a direct connection to its network that will boost service quality.

Just a month ago, momentum was driving Netflix stock ever higher.

Two weeks later, analysts at CRT Capital looked ahead to rapid subscriber growth driven by Netflix's upcoming international expansion. Accordingly, they raised their price target to $505. Despite Netflix stock's rapid rise -- it was below $330 prior to Netflix's January earnings report -- only a few longtime bears weighed in with words of caution.

Two stories
Two news stories that broke last week played a big role in accelerating Netflix's pullback. First, on March 23 The Wall Street Journal reported that Apple was in talks with Comcast to launch a streaming service that would run through an Apple set-top box. This supposed Apple-Comcast service would offer both live and on-demand programming.

However, there was one big catch. Even the Journal's sources admitted that the two companies weren't close to a deal. Companies routinely talk to each other about things that they could potentially do, but most of those informal conversations go nowhere, and so they are not particularly newsworthy.

Apple TV isn't likely to replace your Comcast set-top box anytime soon.

A second major Wall Street Journal story appeared later in the week. This time, it reported that Amazon.com could be close to launching a free, ad-supported streaming service. Amazon did not waste much time in denying this new rumor, stating: "We... have no plans to offer a free streaming media service." (That said, Amazon has something in the works, since it has scheduled a video-related press event for Wednesday.)

Where are all the bulls?
It thus seems pretty clear that neither of last week's main Netflix-related news stories could have justified Netflix's drubbing. When a stock falls 20% for no particular reason, you would expect bulls to become more bullish and for people with neutral views to turn bullish.

Instead, the silence has been deafening. None of the 38 analysts surveyed by Thomson/First Call has changed his ratings on Netflix in the last month, even as the stock has become much cheaper. Analysts' earnings estimates for 2014 and 2015 have fallen by less than 1% in the same period of time -- hardly a significant change.

Among the various possible explanations for analysts' sudden silence, two stand out. First, it is possible that analysts don't want to fight momentum. When Netflix stock was moving in the direction they expected, they were happy to keep raising their price targets. Now that momentum is moving in the other direction, analysts are afraid of being too early on a "buy the dip" call.

The second possibility is that deep down, analysts who were bullish on Netflix at $400 or $450 knew that the stock was not worth that much. The two Wall Street Journal stories published last week may have been inaccurate in implying that new streaming video competition was arriving shortly. However, they did highlight the reality that Netflix has a fairly shallow moat.

Ultimately, for companies on the scale of Apple or Amazon (or even Comcast!), creating a user-friendly interface and good product recommendation algorithms should not be very hard. Moreover, they each have billions of dollars in annual free cash flow to invest in content. If Netflix starts to look like a really profitable business, more serious competition will emerge.

Foolish bottom line
Netflix stock has plummeted in recent weeks, encouraged by press articles that discussed new streaming services from Apple (in partnership with Comcast) and Amazon.com.

Neither of these potential competing services seems likely to see the light of day anytime soon. Nevertheless, Netflix bulls have gone strangely silent. Analysts who were telling their clients to buy Netflix when the stock was well over $400 have not been telling clients to buy now, even though the stock has become much cheaper.

It's hard to know for sure what is motivating Wall Street analysts' buy/sell calls. Perhaps the bulls will come roaring back soon. However, it's also possible that the recent negative press articles about Netflix have struck a nerve. Netflix stock was priced for perfection a month ago. Even the mere hint of some new competition at some point down the road was enough to justify the past month's pullback.

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Read/Post Comments (10) | Recommend This Article (7)

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  • Report this Comment On April 01, 2014, at 11:15 PM, Fo45 wrote:

    These upgrade sellers are silent because they are the momos of momentum. Momentum stocks are, illogical, baseless stocks supported by similar minds. So, one should not expect any logic coming out of these upgrade sellers. Netflix is a $150 stock . it does not own anything but subscribers which are easy come easy go. Billions spent to acquire or produce content and million spent to deliver content there is no way that Netflix can continue with$ 7.99/ month and we know the deleterious effect of increasing membership price. Netflix is counting on new members money to pay what the old one watched so remember what happens to this kind of businesses when there is slowing of new members.

  • Report this Comment On April 02, 2014, at 9:07 PM, SwiperFox wrote:

    I bought mine on the last dip at $76. I was never interested in buying more at this price, even with 20% off.

    Seems like you're preaching to the choir here. Does anyone who turns up at fool.com listen to analysts?

  • Report this Comment On April 03, 2014, at 3:04 AM, mikecart1 wrote:

    While I've never been a fan of NFLX long-term, I have followed it go from $300 to under $100 to back over $400 and now under again.

    I wouldn't be surprised if it bounces back up - even if for the only reason being that it is just a 'popular stock with potential' again.

  • Report this Comment On April 03, 2014, at 9:23 AM, ejprzybylski wrote:

    Where are all the Netflix bulls?

    Out here quietly owning the stock, same place we've always been.

    Where are all the Netflix bears?

    Publishing short theses on NFLX and occupying the short-term-thinking camp.

    And to Fo75, you say, "it does not own anything but subscribers which are easy come easy go."

    Easy come, easy go, eh? Not sure how "easy come" it is, seein as about a dozen other streaming services have completely failed under Netflix' reign (with Amazon being the outlier, but that might have something to do with that little 2-day shipping option.)

    And you say, "easy go?" Netflix only lost about 3% of it's subs during the monumental "Qwikster" debacle, so I'd say those subs aren't so eager to give up their $7.99/month plan.

  • Report this Comment On April 03, 2014, at 2:39 PM, Fo45 wrote:

    I did not mean to offend you. But, to the extent that I know there is no commitment to Netflix brand but to whichever service is able to produce more content. I do not see how Netflix will be able continue to afford content to compete.

  • Report this Comment On April 03, 2014, at 3:37 PM, mountain8 wrote:

    Well if Netflix can't afford content, who can?

  • Report this Comment On April 04, 2014, at 12:46 PM, ejprzybylski wrote:

    Fo75, no offense taken at all, was just addressing your comment.

    I believe there is more than enough room for more than one service to be successful. Even if (and this is a big "if") somebody else were to come along and get more content out than Netflix, I don't think Netflix will die on the vine. Hulu, Prime Instant/Lovefilm, HBOGo are all still successful to varying degrees with similar business models.

    Lastly, Netflix is currently very capable of paying for all of the content it has contracted for. If your argument is that Netflix won't have the cash to pay for future deals, then that means that either a.) content costs go up substantially and universally, pricing out both Netflix and any current competition--which is really hamstringing the content owners themselves, or b.) Netflix lacks cash because subs are detracting--which is possible, of course, but there's been absolutely no indication of that since Netflix started doing business.

  • Report this Comment On April 05, 2014, at 9:56 AM, Fo45 wrote:

    Netflix can not continue selling $20 bill for $19. it will not die but the stock price will nose dive and possibly a take over by a giant will take place.

  • Report this Comment On April 05, 2014, at 12:11 PM, norman1066 wrote:

    Five years from now Netflix will have over 70 million US subs and will be well established in all of the meaningful European markets (possible exception would be Russia). They are already available throughout the Americas and I expect them to enter Asia soon.

    Netflix's profitability is masked by the overseas start-up costs and expense of original content. However, these will gradually become smaller proportions of their vast revenue stream.

    Netflix will be the first global video network. What will that be worth when it is built out? A lot more than today's $20B market capitalization that's for sure! The share price might go down from here but 5 years from now we bulls will recall that as a nice Wall Street sale event

  • Report this Comment On April 06, 2014, at 10:33 AM, TMFGemHunter wrote:

    @norman1066: It's not really meaningful to say that Netflix's profitability is masked by overseas startup costs. The international streaming business and domestic DVD business combined are profitable. While the international losses will go away over time, so will the DVD earnings.

    As for the expense of original content, those expenses are not going away, so I don't see why they should be excluded.

    I'm sure Netflix will keep growing at a good clip and earnings will be several times higher in 5 years. However, I think you're too bullish on Netflix's growth, both domestically and internationally. For example, 70 million domestic subscribers might be feasible eventually, but not in 5 years. At some point well before 70 million subs, Netflix will start to saturate the domestic market and growth will slow down.

    Adam

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