Janney Montgomery Scott analyst Tony Wible downgraded the DVD rental giant yesterday, from neutral to sell. Wible is lowering the stock's near-term price target from $36 to $33.
There are several things that trouble him with Netflix at this point:
- Despite rumblings to the contrary, Wible thinks that there is a strong chance that Blockbuster
(NYSE:BBI)won't file for bankruptcy. Even if it does file for Chapter 11 reorganization, it may actually be a negative for Netflix.
- The stock has held up well during the downturn, but that is dangerous if market multiples continue to shrink.
- The recession has helped Netflix accelerate its subscriber growth, but a deeper recession may kill it if consumers can't even afford to rent flicks.
- Netflix is still not turning a profit on its online streaming, and it is being challenged to grow its offerings to include major studio releases.
At this point, it's important to point out that Wible initiated coverage of Blockbuster two months ago with a buy rating and a price target of $3.25 a share. He has stuck to his call, even though Blockbuster's stock closed at $0.41 yesterday. I'm mildly upbeat about Blockbuster, too, but there's a reason why I own shares of Netflix instead.
In other words, it may be his Blockbuster bullishness that is keeping him from singling out that Netflix's real enemy if the recession deepens is actually Coinstar's
What about the rest of his bearish scenario? I'm not buying most of it. Netflix has been rallying on its improving fundamentals. The company went from watching over 9.4 million subscribers when the year began to topping 10 million users by early February. Do you think any of the 600,000 net additions made their choice based on Blockbuster's viability as a public company? Of course not.
Wible's second point is completely outlandish in my view. Analysts see Netflix growing its earnings by 48% during the current quarter at a time when many other companies are going the other way. In other words, he has it backwards. Multiples are likely to expand -- not contract -- if Corporate America's overall earnings fall faster than their share prices. Netflix's multiple, on the other hand, will shrink unless its stock laps its growth rate this year.
His point about the recession is valid, but folks are more likely to cut out pricier home entertainment subscriptions like their DirecTV
And he's right about Netflix not turning a profit on Web streaming, but it's clearly playing a major role in recruiting new members at dirt-cheap acquisition costs.
Netflix isn't a cheap stock. It trades at 24 times this year's projected earnings and 21 times estimates for 2010. However, at a time when growing stocks are hard to come buy, Netflix joins other recession busters like McDonald's
So, keep betting against Netflix. When it comes to DVD rentals, don't you know the house always wins?
Other Netflix-ish headlines:
Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
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