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Analyst Questions Netflix Valuation

2 Dec, 2013 By: Erik Gruenwedel

Streaming giant’s stock price defies logic, says Wedbush’s Michael Pachter

In the annals of Wall Street, few stocks have been as mercurial as Netflix. Shares of the streaming pioneer closed Nov. 29 at $365.80 per share, or more than 703 times its third-quarter earnings per share of 52 cents.

The stock price was nearly 23% higher than Netflix’s $300 per share valuation in the summer of 2011 before PR snafus and a price hike sent the stock into a tailspin, losing nearly 75% of its value.

Yet, as Netflix adds subscribers and heralds high-profile content license agreements — however the cost, investors continue to artificially prop up the stock, thereby enriching well-heeled holders of coveted stock options, among others.

Michael Pachter, analyst with Wedbush Securities in Los Angeles and long-time Netflix bear, said Netflix faces an inevitable price hike in the future as it reaches a domestic subscriber ceiling. Pachter, who believes Netflix could weather a price hike, said that even if it raised the monthly subscription fee $4 to $11.99 — thereby elevating earnings to $22 per share — the valuation would still be nearly 17 times below what Netflix’s shares closed at Nov. 29.

Then again, were Netflix to significantly up its earnings due to a price hike, content holders such as studios would raise their license fees, according to Pachter, who believes Netflix currently pays the minimum due to the nascent nature of the SVOD market.

“We would expect content providers to seek higher fees for content, in a manner similar to movie studio deals with theatrical exhibitors,” the analyst wrote in a Dec. 2 note. “The studios share in ticket sales, irrespective of ticket price, although minimums are set for film rent. We think that Netflix’s current content deals reflect minimums, and believe that if Netflix were to increase prices, content costs would rise in lock step.”

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