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End of the Line for Netflix?

Rick Aristotle Munarriz
July 6, 2011

Either way you look at it, Netflix (Nasdaq: NFLX  ) is heading south.

Shares of the rapidly growing video provider hit a new-all time high yesterday, announcing a bold southward expansion of its disc-less streaming service. Merriman Capital analyst Eric Wold doesn't think that's the only way that Netflix is going south of the border: Wold is downgrading shares of Netflix, from "buy" to "neutral," on valuation concerns given the recent run.

Yes, Netflix has been dazzling from most starting points. The stock is trading 65% higher so far in 2011, having nearly tripled over the past year. If you go all the way back to when the shares bottomed in the teens three years ago, you'd be looking at a 16-bagger.

The fundamentals have largely held up their end of the bargain. Netflix continues to tack on subscribers at a frenetic pace. There are now 22.8 million domestic subscribers, including 0.8 million streamers in Canada, where Netflix wasn't even available last summer.

Itinerary adjustements
I should point out that Wold doesn't necessarily believe that shares of Netflix will be literally heading south. He just sees limited upside at this point, given his target valuation range of $300 to $330. This isn't a reasonable return on a risk-adjusted basis, given a stock that's trading for more than 40 times next year's projected profitability.

Wold points to Redbox parent Coinstar (Nasdaq: CSTR  ) as an attractive replacement. I disagree. It certainly may seem to be a worthy antidote on a valuation basis, since Coinstar is trading at a forward earnings multiple in the mid-teens, a third of Netflix's number. But the Coinstar thesis crumbles after that.

Valuation concerns aside, I'm confident that Netflix will be a bigger and more relevant company in three to five years. Can the same be said about Coinstar? DISH Network (Nasdaq: DISH  ) recently tweaked the pricing strategy at the Blockbuster stores still standing, closing in on Redbox-esque value for shorter r