Why Netflix, Inc. Slumped This Morning

Does this analyst make a good cas, or is it just more noise from Wall Street?

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Jan 7, 2014 at 10:06AM
Technology and Telecom

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Netflix, (NASDAQ:NFLX) fell 4% this morning after Morgan Stanley downgraded the video-streaming service giant from equal weight to underweight.

So what: Along with the downgrade, analyst Benjamin Swinburne lowered his price target to $310 (from $333), representing 14% worth of downside to yesterday's close. While momentum traders might be attracted to the stock's awesome run over the past year, Swinburne believes that increased competition from the likes of Amazon Prime Instant Video, HBO Go, and Hulu Plus could start weighing more heavily on Netflix's growth.

Now what: According to Morgan Stanley, Wall Street's long-term U.S. subscription forecasts for Netflix are at risk. "Even if Netflix's churn levels fall to record lows, we estimate that over 48MM out of 92MM residential broadband households (~53%) would need to watch Netflix over the next 12 months to meet our 2014E domestic sub forecast of 39MM," it noted. "If monthly churn is closer Netflix's long-term average of ~4%, the number of households would need to reach ~52MM (~57%)." When you couple those competitive headwinds with the stock's forward P/E of 90, waiting for a wider margin of safety certainly seems prudent.