Analysts Could Keep Pressure On Netflix Next Week (NFLX)

Netflix Inc. (NASDAQ: NFLX) felt a sting on Friday after an analyst downgrade.  The home delivery of all-you-can-eat video rentals provider may have some additional answering to do when it comes to analyst coverage and profit taking as the valuations have continued to go up and away.

Today’s analyst downgrade came from Susquehanna, which cut the rating to Negative based on unsustainable valuations and the target is now $120 per share.  What is interesting is where this will come in on the Investors Business Daily rankings this weekend.  Netflix has spent a few weeks as the #1 position in the IBD 100 despite some weeks (maybe since August) having mixed trading.

Last week it closed out at $162.21 per the IBD100.  In late-day trading this Friday shares are down 4.4% at $155.00 on active trading and it was just yesterday that the stock hit a high of $174.40 with two days of hitting $170 this week and if today’s levels hold up then the stock will have closed down 3 of the 5 trading sessions this week.

We have to consider that the 52-week trading range is now $44.30 to $174.40, so even though it keeps adding subscribers it has some valuation concerns.  With Thomson Reuters estimates of $2.79 EPS for 2010 and $3.73 EPS for 2011, when we average the two for a normalized ‘forward earnings multiple’ we get a forward P/E of roughly 47…  Whether it deserves that multiple is up to you, but the new normal probably has some limitations to just how high multiples should be.

Analysts had already cut Netflix shares on the way up even before the move higher in the last couple of weeks.  A New York Times article also added a little pressure in recent days, but that failed to keep any pressure on it.

In the last couple of weeks Jefferies raised its target to $175 and Wedbush Morgan had been positive on it as well.  Credit Suisse raised the rating in the last couple of weeks, but only to “Neutral.”  Before that, Piper Jaffray had maintained an “Overweight” rating and ThinkEquity started it with a “Hold” rating at the start of September based upon valuations.

The valuations have gotten high on this one.  For it to not be as expensive, Netflix will have to continue adding deals and it will have to keep blowing out earnings expectations and keep adding a million or so subscribers per quarter.  If not, more downgrades could be on the way.

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JON C. OGG