In less than a month, Netflix, (NFLX -8.90%) has gone from rocket stock to free-falling basket case. After soaring to a new all-time high of $458 in early March, Netflix stock has dropped by more than 20%, closing at $352.03 on Monday.
Netflix 1-year stock chart. Source: YCharts.
For most of March, Netflix shares were in a steady but slow retreat. In the last week and a half, that retreat turned to a rout, driving Netflix stock from more than $420 to around $350. Netflix's sudden and sharp pullback has been helped along by some key news stories. These suggested that companies including Comcast (CMCSA 1.19%), Apple (AAPL -1.19%), and Amazon.com (AMZN -2.73%) were preparing new streaming video services.
None of these reports appears to be particularly credible. However, these rumors have discredited the idea that Netflix will maintain a virtual monopoly on streaming video in the long run. As a result, bullish analysts who were promoting Netflix stock as it soared past $400 just one month ago have gone silent even as the stock has become significantly cheaper.
Not too long ago...
If we look back just a month or so, many bullish Netflix analysts were telling their clients to keep buying Netflix stock even as it soared past $450. Analysts at Needham & Company raised their price target to $525 in late February and opined that Netflix got a great deal from Comcast for a direct connection to its network that will boost service quality.
Just a month ago, momentum was driving Netflix stock ever higher.
Two weeks later, analysts at CRT Capital looked ahead to rapid subscriber growth driven by Netflix's upcoming international expansion. Accordingly, they raised their price target to $505. Despite Netflix stock's rapid rise -- it was below $330 prior to Netflix's January earnings report -- only a few longtime bears weighed in with words of caution.
Two stories
Two news stories that broke last week played a big role in accelerating Netflix's pullback. First, on March 23 The Wall Street Journal reported that Apple was in talks with Comcast to launch a streaming service that would run through an Apple set-top box. This supposed Apple-Comcast service would offer both live and on-demand programming.
However, there was one big catch. Even the Journal's sources admitted that the two companies weren't close to a deal. Companies routinely talk to each other about things that they could potentially do, but most of those informal conversations go nowhere, and so they are not particularly newsworthy.
Apple TV isn't likely to replace your Comcast set-top box anytime soon.
A second major Wall Street Journal story appeared later in the week. This time, it reported that Amazon.com could be close to launching a free, ad-supported streaming service. Amazon did not waste much time in denying this new rumor, stating: "We... have no plans to offer a free streaming media service." (That said, Amazon has something in the works, since it has scheduled a video-related press event for Wednesday.)
Where are all the bulls?
It thus seems pretty clear that neither of last week's main Netflix-related news stories could have justified Netflix's drubbing. When a stock falls 20% for no particular reason, you would expect bulls to become more bullish and for people with neutral views to turn bullish.
Instead, the silence has been deafening. None of the 38 analysts surveyed by Thomson/First Call has changed his ratings on Netflix in the last month, even as the stock has become much cheaper. Analysts' earnings estimates for 2014 and 2015 have fallen by less than 1% in the same period of time -- hardly a significant change.
Among the various possible explanations for analysts' sudden silence, two stand out. First, it is possible that analysts don't want to fight momentum. When Netflix stock was moving in the direction they expected, they were happy to keep raising their price targets. Now that momentum is moving in the other direction, analysts are afraid of being too early on a "buy the dip" call.
The second possibility is that deep down, analysts who were bullish on Netflix at $400 or $450 knew that the stock was not worth that much. The two Wall Street Journal stories published last week may have been inaccurate in implying that new streaming video competition was arriving shortly. However, they did highlight the reality that Netflix has a fairly shallow moat.
Ultimately, for companies on the scale of Apple or Amazon (or even Comcast!), creating a user-friendly interface and good product recommendation algorithms should not be very hard. Moreover, they each have billions of dollars in annual free cash flow to invest in content. If Netflix starts to look like a really profitable business, more serious competition will emerge.
Foolish bottom line
Netflix stock has plummeted in recent weeks, encouraged by press articles that discussed new streaming services from Apple (in partnership with Comcast) and Amazon.com.
Neither of these potential competing services seems likely to see the light of day anytime soon. Nevertheless, Netflix bulls have gone strangely silent. Analysts who were telling their clients to buy Netflix when the stock was well over $400 have not been telling clients to buy now, even though the stock has become much cheaper.
It's hard to know for sure what is motivating Wall Street analysts' buy/sell calls. Perhaps the bulls will come roaring back soon. However, it's also possible that the recent negative press articles about Netflix have struck a nerve. Netflix stock was priced for perfection a month ago. Even the mere hint of some new competition at some point down the road was enough to justify the past month's pullback.
