What happened
Shares of Netflix (NFLX 4.17%) traded 3.5% higher at 3:20 p.m. EST, sparked by a few positive words from an analyst firm. Netflix stock rose as much as 4.5% earlier in the trading session.
So what
Bank of America Securities analyst Jessica Reif Ehrlich restarted the firm's coverage of Netflix this morning. The bank upgraded Netflix by two whole steps, from a "sell" recommendation to a "buy" rating. Reif Ehrlich set her 12-month target price at $370 per share, 24% above Monday's closing price. This target was based on a generous enterprise value-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio, then confirmed with a discounted cash-flow analysis.
Reif Ehrlich's financial model rests on the assumption that Netflix will continue to lead the streaming media market, which the analyst expects to grow many times larger in the long run. In particular, the company is expanding its subscriber base quickly in developing markets overseas.
Now what
This bullish report also came with an asterisk, saying that the analysis didn't account for any financial gains based on the just-launched ad-supported service tier or the crackdown on password-sharing customers. In other words, Bank of America's target price may look generous today but could still turn out to be quite conservative when push comes to shove.
Mind you, I'm still not convinced that an ad-based viewing experience is a good fit for the Netflix brand. Launching that troublesome idea in the middle of a digital-advertising downturn strikes me as a double dose of bad news.
Netflix remains the largest holding in my personal stock portfolio, and I expect great returns as the stock recovers from this year's brutal beatdown. I just don't think the healing will come from an ill-advised advertising plan. That's why I don't mind Reif Ehrlich leaving ad-based plans out of her valuation analysis. The company has to prove that it's a good business idea first, and I'm not convinced that it can.
But Netflix has proven me wrong before, and I invite the company to do it again. Netflix has so many qualities in its favor that the stock is a no-brainer buy today even if the ad-tainted service fails.
