This Netflix Downgrade Doesn't Make Any Sense

By Markets Fool.com

Image source: Netflix.

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Analysts have every right to turn bearish, but sometimes they can get burned by bad timing and a poor thesis.Needham analyst Laura Martin downgraded shares ofNetflixon Tuesday. She argues that UK's Brexit referendum vote could weigh on subscription growth for the platform through Europe. Tack on the ramifications of unflattering currency fluctuations and EU requirements for streaming services to offer more homegrown content and Martin sees the stock as "priced for perfection" at current levels.

The stock may have opened lower on the downgrade -- Needham's rating is going from Buy to Hold -- but the negativity didn't last. A few hours into the trading day the stock broke through the $100 ceiling. It was the first time that Netflix stock traded in the triple digits in nearly a month.

Netflix stock moved higher after Recode confirmed that the leading premium video service is teaming up with Comcast to offer Comcast cable television subscribers direct access to Netflix later this year through its X1 set-top box platform.

The good news didn't end there. Less than an hour after Recode broke the Comcast news, Netflix announced that it had entered into a multi-year licensing deal with the CW network. The network -- a joint venture between CBS and Time Warner -- will continue to offer earlier seasons of its scripted shows exclusively in the U.S. market through Netflix.

Martin may have figured that she was timing her bearish move just right. Netflix stock had risen for four consecutive trading days ahead of Tuesday's downgrade. But the streak didn't end. Netflix shares have now risen 15% in the past five trading days.

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Keeping your enemies close

Playing nice with Comcast, CBS, and Time Warner isn't easy. They all have reasons to fear Netflix as a disrupter. Comcast is the country's leading cable provider, and cord cutters are turning to Netflix as a video entertainment substitute to Comcast's steep monthly bills. CBS and HBO parent Time Warner have a lot riding on the success of the cable industry given the hefty fees they receive as part of chunky channel bundles.

However, Comcast has already seen smaller cable providers play nice with Netflix, giving those subscribers direct access to the platform through their set-top devices as a way to keep pay TV customers from leaving. The moment they invest in a Roku or Chromecast stick the cancellation calls for all but broadband can't be too far away.

CBS and Time Warner know that Netflix and its 81.5 million global subscribers are too large an audience to ignore, just as they know that no one can afford to pay as much for content as Netflix with its $12.3 billion in streaming content obligations.

This doesn't mean that we can merely dismiss Needham's downgrade as a case of bad timing. The actual rationale for the downgrade isn't easy to swallow. It's true that the EU could take a hit if the UK goes through with its exit. The European economy can soften, and that -- on the surface -- will sting consumer-facing companies. Luckily for Netflix it has shown the ability to thrive under recessionary climates.

Do you remember 2008? The subprime lending crisis shattered financial markets. The global economy stalled. Stocks crashed. How did Netflix fare through all of this? The shares rose 12% in 2008, one of the few consumer stocks to move higher in a brutal market year. Netflix's subscriber base climbed 26% to 9.4 million for the year. It was largely a DVD rental provider at the time. The streaming offering was just gaining traction. However, Netflix grew at a time when consumers were scaling back expenditures in a rough economy because Netflix offered solid entertainment value for homebodies. That's the same Netflix value proposition we have today. Brexit or not, it's the right offering at the right time. The same can be said about Netflix stock.

The article This Netflix Downgrade Doesn't Make Any Sense originally appeared on Fool.com.

Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix and Time Warner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.