What: Shares of Internet streaming content delivery service Netflix (NASDAQ:NFLX) shot higher by $3.60 on Friday to close at $478.20, its highest close since mid-September, following a price target hike from analysts at Topeka Capital Markets.
So what: According to David Miller, the covering analyst at Topeka Capital Markets, which kept a "buy" rating on shares of Netflix, the third season of House of Cards, which is scheduled to debut this week, will be a major catalyst that could send Netflix shares higher.
As Miller commented in his research note to investors, "The next 1-2 weeks worth of trading sessions should be very interesting, and likely rewarding, for long investors because the long-awaited Season #3 of House of Cards will debut on Netflix one week from today."
Miller's assessment is based on the increase in activity experienced when House of Cards season 2 was released on Valentine's Day in 2014. All told, Miller boosted his firm's price target from $494 to $527, implying 10% additional upside from its Friday closing price.
Now what: This is a really good example of why paying attention to analyst musings sometimes just isn't worthwhile. Although Netflix very well might hit $527, the simple fact that Topeka Capital is focusing on a single series over a one- to two-week time span is somewhat absurd and it doesn't do long-term investors one iota of good. It's one of the sillier reasons for a price target hike that I've observed early on in 2015.
The real question that investors need to ask is whether Netflix deserves to be a $527 stock. I personally believe it's a mixed bag.
On one hand, Netflix is really beginning to see dividends from its investment in overseas markets. It added 2.43 million streaming members in the fourth quarter. Furthermore, its margins within its core U.S. market grew substantially to 28% from 23.4% in the year-ago period.
But Netflix also boggles the mind. I fully understand the need to reinvest back into its business, but $78 million in negative free cash flow, no shareholder incentives (buybacks or dividends), and the expectation for ongoing losses from its international segment make a forward P/E of 85 a very difficult pill to swallow. In addition, the simple fact that its growth rate should creep below the 20%-per-year mark in 2016 and beyond (based on Wall Street revenue consensus estimates) implies that we'll begin to see some level of U.S. saturation in the coming years.
In other words, while I wouldn't rule out $527 as a viable price target, I see considerably more room to the downside in Netflix shares than to the upside given its recent performance and future profit prospects.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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