Why Analysts Are Playing Catch-Up With Netflix (NFLX, AMZN, CSTR, BLOAC, AAPL)

If nothing succeeds like success, then Netflix, Inc. (NASDAQ: NFLX) could be on the verge of being wildly successful. The company absolutely smoked first quarter expectations, and the stock is now trading well above consensus estimates of $160/share. Did analysts miss something or is the jump in Netflix shares another example of irrational exuberance?  Yes, and now they are playing catch-up.

The company delivered fourth quarter EPS of $0.87 on revenue of about $596 million. Analysts expected EPS of $0.71 on about $597 in revenue. The company added 3.08 million net new subscribers, and now boasts some 20.1 million subscribers compared with expectations of 19.7-19.9 million.

Guidance for the first quarter was  $0.90-$1.13 EPS on revenue of $694-$718 million, both well above the consensus estimates of EPS at $0.87 and revenue of about $691 million.

The company’s growth came in its streaming video business, where the company reports that more than one-third of new subscribers are signing up for the streaming-only plan and only a few existing DVD-subscribers are downgrading to the streaming only plan.

Amazon.com (NASDAQ: AMZN) currently offers streaming video for $0.99 each, but has no subscription package available. The Wall Street Journal reported in December that Amazon is working on a subscription service that might be bundled with the company’s Amazon Prime shipping service, which now costs $79 annually. The Netflix streaming-only subscription costs about $96 annually.

As for DVD rentals, Coinstar Inc., which owns and operates the Redbox kiosks, missed its fourth-quarter targets and slashed guidance significantly. There are some analysts who believe that the Redbox kiosk will soon follow Blockbuster Inc. (OTC: BLOAC) down the road to bankruptcy. Coinstar could well avoid that fate, but it won’t be through video rentals. More likely is a slow death similar to Blockbuster’s.

But what about those analysts who downgraded Netflix shares all through 2010? A quick look at Yahoo Finance shows that six of eight ratings action were negative last year. One of those, Caris & Co., has already reversed itself today. What gave analysts cold feet about Netflix was its sky-high trailing P/E ratios. One year ago the company’s P/E ratio was 34.6; six months ago it was 46.6; one month ago it was 69.9. According to Yahoo Finance, the trailing P/E ratio today is 79.35.

Just this morning came an upgrade to “Market Perform” from Morgan Keegan, and ThinkEquity raised the rating to “Buy” with a $220 target.  The big call came from Bank of America Merrill Lynch where it raised the rating to “Buy” and gave a whopping $275.00 price target.  If that is not trying to play catch-up, what is?

This still looks and feels like nosebleed territory and no analyst wanted to get spattered with blood by recommending that customers buy the stock. After all, this is not Apple Inc. (NASDAQ: AAPL) we’re talking about here. We recently noted that Netflix could become one of the next monopolies if it chose to, but there are some hurdles to having that status in the classic definition.

Whether or not the analysts who are now raising their ratings are too late remains to be seen. Amazon is not the only potential competitor for Netflix, and big media companies like Viacom, Lions Gate, and MGM are working on their own streaming service to capture more revenue.

Netflix has a big head start here, and if it can continue to deliver streaming content to subscribers at a reasonable price, then it’s hard to see why a lot of those subscribers would dump the service for a me-too clone. What could make a difference is the availability of new movies and TV shows more quickly on a competitor. Netflix must wait 28 days after the content owners release the DVD before the company can stream. Netflix doesn’t see that as a problem, and they have been right more often than anybody else so far.

Netflix shares posted a 52-week high this morning of $211.30, and is currently trading at about $210, up nearly 15% from yesterday’s close.

Paul Ausick