Amid Mixed Signals, What's a Netflix Shareholder To Do?

By

Published October 11, 2012

| FOXBusiness

Investors looking for some definitive direction on Netflix (NFLX) may be scratching their heads amid all the hoopla surrounding the stock in recent weeks.

Ready for some mixed signals?

Citigroup (C) last week issued a “screaming buy” on the stock and Morgan Stanley (MS) upgraded the Los Gatos, Calif.-based company to “overweight” from “equal-weight,” helping Netflix’s shares to surge more than 25% in a week.

The bears were quick to hush the optimism this week, though, with Moody’s saying it has put Netflix on review for a downgrade and Bank of America (BAC) slapping the company with an “underperform” rating from a “buy.”

The latter cited the recent run-up of Netflix’s stock on little to no news and claimed the “risks outweigh the reward.” The negative notes caused shares of Netflix to tumble more than 10%.

Not surprisingly, the mixed reviews have been causing a bit of confusion, once again throwing Netflix’s shareholders off balance after what has been a roller coaster year since the movie streamer said it would raise prices last summer.

So, what’s a shareholder to do?

Investors looking to get a solid “buy” or “sell” argument can’t rely on just one analyst’s note (nor should they) because both sides speak to valid points, from competition and programming to subscriber growth rates and expansion.

Investing in Netflix requires would-be shareholders to do their own research and plow through the various opinions by analysts to cut through the jargon and make their own decision.

“There’s merit to both arguments,” said Rob Enderle, principle analyst at the Enderle Group, who covers the tech industry.

For example, Andy Hargreaves, an analyst at PacificCrest Securities who has a “buy” rating on Netflix, is not worried about Netflix’s subscriber rates because he thinks there is still plenty of room to grow, especially for streaming in international markets.

“You’re getting the stock discounted now because international is losing money, but if you look at that as an investment rather than a perpetual loss that’s something that can turn positive and benefit you over time,” he said in an interview with FOX Business.

Netflix began its streaming service in the U.S. in 2007 before expanding to Canada in 2010, Latin America in 2011 then the U.K. and Ireland, as well as the Nordic countries, earlier this year.

As with many other multinational companies, though, expansion hasn't always been easy, and the bears are always quick to point that out.

“When Netflix moved into Canada it was a very favorable market where they had much name recognition already, and even Canada took several quarters to reach breakeven,” said Justin Colatosti, a Dawson James Securities analyst who has held a “sell” rating on Netflix since its shares hit $275 in 2011. “In much of the international market Netflix faces additional issues,” he said.

The issues he's referring to can be anything from the lack of broadband penetration rates in Latin America to the higher levels of piracy in other parts of the world.  

Competition continues to be another point of debate, yet the analysts most upbeat on Netflix don't think it's really anything to worry about. They express doubt that competitors like Amazon (AMZN) or Coinstar’s (CSTR) RedBox will be able to knock Netflix off its pedestal.

“We’re always worried about competition but you add all those guys up together right now and you have a subscriber base that’s about a third as big as Netflix’s,” Hargreaves said. Netflix “has massive scale advantages.”

However, the bears have tried to debunk those theories, pointing to Amazon in particular, which already offers through its $79-a-year Amazon Prime service the ability to stream free movies and TV shows. The No. 1 online retailer earlier this week shelled out a considerable amount of money to get its hands on some 3,000 more movies from Epix, a partner between movie studios Metro-Goldwyn-Mayer, Lionsgate and Paramount Pictures, which had once been exclusively offered by Netflix.

T2 Partners co-manager, Whitney Tilson, has nevertheless said he doesn’t “see any detectable competition showing up.”

At the same time, Netflix has struggled to maintain a steady stream of programs, losing Starz a year ago, which led to the pulling of some 840 films, including big-name releases from Sony Pictures and Walt Disney Pictures.

The company “has been bleeding programming,” Enderle said, adding that the "inability to maintain consistency has been a problem.”

Analysts have bickered over whether this could lead to a cannibalization of Netflix’s subscriber base, with the bears citing the potential for a slowdown amid rising competition and the bulls scoffing at their ability to make a meaningful dent.

But one thing to remember is that many companies, including several major cable companies and even Apple (AAPL), have struggled with content acquisition, and many over time were able to prevail.

“There’s a misperception in all of this that this is a zero-sum game and that if you subscribe to one you   can’t to the other. I think that’s totally wrong and we see that in our survey data,” Hargreaves said.

Analysts will be watching the number of streaming customers Netflix added last quarter when it reports earnings later this month. In order to meet its target of adding 7 million new U.S. streaming subscribers this year, Netflix, which added about 2.3 million in the first half of this year, said it would have to have a strong third quarter.

No matter the side that ultimately prevails, there’s no doubting that Netflix’s stock is cheaper compared to where it was a year ago. Its shares have fallen some 75% since its high of $295 last July and today sit at just $65, which is up slightly from a low last December but down 5.2% since January.

At least for now, one thing the bulls and bears can agree on is that Netflix remains the market leader in streaming. Whether it becomes successful with its push into original programming or overcomes the programming challenges remains to be seen.

URL

http://www.foxbusiness.com/investing/2012/10/10/amid-mixed-signals-what-netflix-shareholder-to-do/