Netflix Is Flying too Close to the Sun

By Angus Robertson

Is Netflix (NFLX) more like Apple (AAPL) or Blockbuster (BLOAQ.PK)? Will it be able to stay one step ahead of its myriad competitors or will rising costs burst its bubble? The company on Mondayreported strong earnings but a more cautious outlook.

We've noted Netflix's heady valuation here for some time but the company continues to impress and certainly is not resting on its laurels, moving into the original content arenaas a way to differenitate its offering. Trouble is, this move along with increasing demands for higher payments from movie studios, could mean that ballooning content costs will drag the high-flying company back down to earth.

Tony Wible at Janney Capital is the latest to join the small but growing number of analysts who are skeptical of the Netflix story. He cut his rating to Sell from Neutral with a $170 fair value estimate (down from $175).

Notable Calls writes that Janney believes it will be increasingly more difficult to support Netflix's high valuation in the face of headwinds tied to Usage Based billing, a deceleration in sub growth, and an increase in competition that will likely trigger an increase in content costs and SAC. Furthermore, they are troubled by the company's streaming cost accounting and its limiting of disclosures in this increasingly volatile environment.

As previously noted, Michael Souers of Standard & Poor's on Feb. 23 cut his rating on Netflix to Sell with a $160 target following news of Amazon's entry into the streaming market, and Needham's Charlie Wolf lowered his rating to Underperform with no target

And Michael Pachter at Wedbush Securities remains unimpressed. He has rated Netflix Underperform since November 2009 and currently has a price target of just $80.

But there are plenty of analysts still riding the Netflix bandwagon.

Cannacord Genuity's Heath Terry boosted his target to $300 from $250."We continue to believe that Netflix is in the sweet spot between declining physical competition and rising digital competition,"he wrote in a report.

Several firms reiterated positive ratings and price targets in the $300 range. But some beginning to express reservations: As The Motley Fool notes:Wedbush Morgan, for example, was quoted in the Journal today grumbling that streaming costs could double or triple between 2011 and 2012, to as much as $2.2 billion. Morgan Stanley sees the higher costs hurting Netflix's "ability to beat rising expectations." Stifel Nicolaus notes that Netflix's international investments will likely lose money this year, while Goldman Sachs fears that higher "monthly domestic churn of 3.9% … is not going in the right direction." And Bank of America points out that "subscriber acquisition cost ticked up," and a "decelerating inflection point" could be near.

"Selling for 66-times earnings today, Netflix is priced for a success that its 30% projected growth rate will be hard pressed to achieve," TMF's Rich Smith writes.

Netflix closed yesterday down 9% at $228.91, compared with amedian 12-month analyst price target of $225.