Netflix shares surged to a record high after earnings, but one longtime Netflix bear is maintaining his gloomy outlook.
"We believe that Netflix's current valuation is unwarranted given the potential for sustained decelerating domestic growth coupled with consistently elusive international profitability, in addition to increased competition," Wedbush analyst Michael Pachter wrote in a Thursday note.
He actually raised his 12-month price target to $68 from $60 in reaction to the company's results, but notably, this still implies the expectation for a 50 percent drop for the stock, and Pachter retained his underperform rating.
This is far from the first time the analyst has trained a bearish eye on the streaming giant. Going back to January 2014, Pachter's price target has consistently been about half of the stock's price.
"I'm in my fifth year [of doubting Netflix], so clearly my one-year price targets are not to be relied upon," Pachter said Thursday on CNBC's "Trading Nation." In his post-earnings note, he admitted that "It is likely that we will be wrong for a while longer, as there is more quality content than ever before and Netflix has certainly had its share of hits."
Yet, like Wile E. Coyote outrunning a cliff, Netflix shares will eventually fall prey to their shy-high valuation, in the analyst's view.
The stock's rally "is going to end when investors focus on cash flow and stop hoping that all these new subscribers will turn into profits someday," Pachter said Thursday. Netflix is building a library that "has a very speculative value, and I think shareholders are being lulled into a false confidence" about the value of the company's content.
To Pachter's point, Netflix investors tend to pay closer attention to subscriber growth than to earnings expansion or to cash flow. This makes sense given that earnings are minuscule relative to the company's value; investors are paying for the future value of the company rather than the present value.
While Pachter says he "could say this stock defies logic and it trades on sentiment," he notes that he was "trained classically" to value companies on the "discounted present value of future cash flows."
To be fair, other analysts are doing this too — they are just arriving at very different long-term earnings estimates. For instance, Cantor Fitzgerald analyst Youssef Squali's model has Netflix (which made less than 50 cents per share in 2016) earning more than $14 per share in 2024. On the strength of his optimistic outlook, Squali upped his price target on the stock to $160 after earnings.
Meanwhile, some of Pachter's onetime fellow Netflix bears "threw in the towel," as he put it. Macquarie analyst Tim Nollen, for instance, upgraded his rating on the stock to neutral from underperform, increasing his price target to a level still below the current level of the stock.
After seeing the mild upgrade, "I kind of smiled," Pachter said Thursday. "I could do that," he added.