Analysts Put the Brakes on Netflix Shares

18 Jul, 2011 By: Erik Gruenwedel

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A week after announcing dramatic price increases, Wall Street continues waving the yellow flag

Netflix shares July 18 cooled again after an analyst said the online disc rental pioneer’s subscriber growth potential does not reflect the stock’s valuation.

Speaking on CNBC’s “Fast Money,” Andy Hargreaves, analyst with Pacific Crest Securities in New York, said Netflix continues to operate a sound business model — a model it can sustain but not at current market valuations.

Netflix shares July 18 closed down $7.93 to $279 per share — a decline of nearly 8% from a high of $301.63 July 13.

Hargreaves believes Netflix’s success affords it to pay studios and content holders a premium for programming — a reality that also has become a two-edged sword.

“In a way it becomes a barrier to entry for them,” Hargreaves said.

The analyst said it is fair to assume there are tens of millions of customers out there in the United States — maybe 100 million, certainly 70 million internationally — who want the service. He said it is also fair to assume these myriad new subscribers are going to get ubiquitous streaming access with few flaws from an execution standpoint.

“This pricing change has caused a lot of negative reaction from customers on the Internet, but at the end of the day I think they will manage through that and do fairly well with it because there just aren’t that many good alternatives that are as convenient and cheap as Netflix,” Hargreaves said.

He said he remains positive on the fundamentals of the business, but is only willing to pay a certain price.

“And $300 [per share] isn’t the price we want to pay,” Hargreaves said.

Analysts on Fast Money said Netflix’s domestic growth could slow while the upside potential remains strong.

“I think there is still a lot of room for growth, but unfortunately I think you have to take some chips off the table [at the moment],” said Fast Money analyst Steve Grasso, adding that a “billion people” have tried to short Netflix without success.

Netflix reports second-quarter results July 25.
 

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