At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the best ...
As Dawson reports, Netflix has already seen its monthly average revenue per user decline 8.7% from 2009 to 2010, and things are only going to get worse in 2011 and beyond. For one thing, a cavalcade of competitors is breathing down its neck, in the form of Hulu and Facebook, Amazon.com
As pricing pressure increases, Dawson warns, Netflix's costs are set to explode. "Acquiring streaming television content will likely continue to become more expensive," says the analyst. Meanwhile, the "inexpensive and unlimited bandwidth" that Netflix depends upon to deliver its "flix" over the "Net," could be going away soon. Level 3 Communications
In sum, Netflix is getting less cash per user in its customer database and rivals are threatening to steal even these customers away. Meanwhile, the cost of providing movies to the customers that remain will skyrocket. Does this sound like a buy thesis to you?
Let's go to the tape
It doesn't to Dawson, and that's why the analyst says you should sell Netflix today -- and you might want to listen. While Dawson James isn't the most prolific stock picker out there, it has demonstrated a real ability to pick winners and losers over the four years we've been tracking it: 63% of Dawson's recommendations to-date have beat the S&P 500's performance, by an average of 38 percentage points per pick!
While it's true Dawson spends most of its time making biotech picks, this banker is no slouch in the tech arena either. In fact, its all-time best recommendation -- VirnetX Holding
I think they're going to do it again with Netflix.
Content is king, but valuation matters, too
Don't get me wrong: I love Netflix, the business. I bought into its DVDs-by-mail business model years before Blockbuster bit the dust. (Indeed, my admiration for Netflix was a big reason I predicted the Blockbuster bankruptcy before it happened.) I love the company's video streaming service, too, and find it much more user friendly and intuitive -- and offering vastly more choices -- than the "on demand" offerings of cable providers like Comcast
But great as the business looks to me, my decision to buy or sell the stock always comes down to valuation. While I think Netflix's $8-a-month rental service is a great deal, I have to admit that I just don't see the value in Netflix's stock today.
At $285 a share, Netflix now sells for more than 80 times annual earnings. Free cash flow (when factoring in repeated acquisitions to keep its library current) tends to lag reported earnings at the company, so the P/FCF on this company is an even pricier 85. As much as I respect the firm's ability to grow earnings in the past, and Street predictions of 30% annual growth in the future -- that's simply not fast enough to justify the stock price.
While I wouldn't necessarily go out and short the stock today (because an irrationally priced stock can always become more so), I certainly wouldn't buy it.
Fool contributor Rich Smith owns shares of Google but does not own (nor is he short) shares of any other company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 558 out of more than 170,000 members. The Motley Fool has a disclosure policy.
The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Netflix, Amazon.com, and Google, and buying puts on Netflix.
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