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Netflix: Still Worth Putting in Your Queue?

Monday, 8 Oct 2012 | 2:59 PM ET
Netflix
Netflix

Netflixhas surged more than 30 percent in the past week, with Monday’s 10 percent gain sparked by a Morgan Stanley upgrade. Yet at least one analyst suggests investors tread cautiously.

Morgan Stanley upgraded Netflix to “outperform” from “neutral” with an $85 price target, on the view that the company can grow earnings through smart content acquisitions and only modest subscriber growth.

Although Amazon.com is challenging Netflix with its own streaming video offering, Amazon is not a direct threat to Netflix’s U.S. business, according to the broker.

A few other analysts share Morgan Stanley’s bullishness on Netflix. However, Lazard Capital Market’s Barton Crockett is less optimistic about Netflix’s U.S. business. He believes it will ultimately look like the HBO cable network, which has about 30 million subscribers but limited avenues for growth.

“If they keep spending where it is today they can make a nice profit and fund international expansion,” Crockett said. “What I'm scared of is they believe their opportunities are much larger, that they can expand beyond their opportunity.”

Netflix Upped by Morgan Stanley
Netflix stock was upgraded to an overweight by Morgan Stanley this morning. Barton Crockett, Lazard Capital Markets, and Andy Hargreaves, Pacific Crest Securities, discuss.

One risk is that with other content providers like Time Warner, Viacom and Walt Disney putting more content online, Netflix may have a harder time attracting new subscribers.

There’s also a good deal of uncertainty in the business model, which could send the stock either charging higher or swooning — by as much as 70 percent in a year, Crockett said.

“It has a lot of revenue, very little margin,” the Lazard analyst said. “Any wiggles up and down on expenses or revenue and you can say ‘best stock ever’ or ‘wipeout.’”

Crockett has a “neutral” rating on Netflix, telling CNBC, “I don’t think the risk is worth the reward.”

He added: “There’s a good business underneath, but I’m not confident that Netflix is spending at the level that will reward shareholders today.”

Yet Andy Hargreaves, an analyst with Pacific Crest Securities, counts himself among the Netflix bulls. He maintains an “overweight” recommendation on the stock, with a $130 price target, implying an upside of nearly 80 percent.

Hargreaves told CNBC on Mondaythat the pace of spending on new content will slow. “As long as they manage it so it’s within the realm of subscriber growth, the business should look really good,” he said.

He also points to the explosion in network-enable devices like tablets and smartphones as another reason for people to continue to sign up for Netflix.

—BY CNBC.com’s Justin Menza

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Additional Views: Netflix: Back from the Dead?

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Disclosures:

Lazard makes a market in Netflix securities.

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