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Although I am a big proponent of bottom up financial analysis, I also believe that investor sentiment and exaggerated positioning within a stock have just as much impact at predicting future stock movements as detailed number crunching. From the evidence that I am currently looking at, the market exuberance for shares of Netflix (NASDAQ:NFLX) is rather alarming and is signaling that a major correction might be in order.

A Bit Of History

If you will indulge me for just a moment, I would like to briefly go over the boom-bust history of Netflix shares over the last few years. To current shareholders, the news will not be very enlightening, but it will nonetheless be critical in understanding the future direction of the stock.

As you can clearly see from the graph above, Netflix has had it's share of ups and downs. 2010 was a phenomenal year for the stock, with shares basically quadrupling. 2011 was an unequivocal a disaster. Despite shares increasing 50% in the first 6 month of the year, reaching a high of $300 in July, the stock had a terrible second half, and the company lost about 77% of its value, ending 2011 at $69.29 per share. Now that is what I call a swing! 2012 was comparatively sleepy. Shares traded slightly up, but there was no real direction. And then came 2013; shares blasted through the roof, increasing almost 300%.

With those kind of price swings, Netflix might not be the type of stock which appeals to all investors. It takes a specific breed of speculator to appreciate the daily fluctuations and, to in fact, be able to profit from them. Some large investors, like Carl Icahn, have made a fortune by trading the stock. Others, I am sure, have not been so lucky.

From One Extreme To Another

The schizophrenic stock price can actually be used to help investors determined to trade this stock. The fact that the shares can swing from one extreme to another so rapidly gives us great insight into the types of shareholders which jump in and out of their positions in the company.

Despite a rather large institutional ownership in the stock, reaching about 92% as of the latest calculation, it would seem that the stock is highly susceptible to massive price swings. As is often the case, the price swings can probably be attributed to the marginal investors. Those who do not have a huge stake in the company, but are the active traders. Just as fast as these short term money chasers can drive a stock price up, they can crash it back down. It seems that this is a long told story for Netflix.

Numbers Take A Back Seat

With a stock like Netflix, detailed financial analysis does not play a major factor in helping to determine future stock prices. Currently, the P/E ratio is over 200; that's sounds a bit extreme by any stretch of the imagination. The company has a market cap of about $22 billion, but it only earned $17 million last year. Growth, in terms of subscribers, has been huge, expanding from just over 22 million US streaming members in 2011, to over 30 million as of the last reporting period. But at the same time, the company seems to be having a very difficult time increasing subscription prices. In 2011 the company faced a subscriber mutiny over plans to adjust services and prices, and so far the company has been reluctant to bring up the subject again.

From a financial standpoint, this is a huge negative for the company. For example, based on financials, the market seems to be valuing Comcast's (NASDAQ:CMCSA) pay-TV customers at $2265 each, while only placing a value of $395 per customer for Netflix's U.S. streaming service. The disparity seems to all boil down to revenue per subscriber. While Comcast is able to earn about $952 from each of it's subscribers, Netflix is only able to wring out about $89 per subscriber on a yearly basis.

For the time being, both Netflix and Comcast shares are trading near all time highs, so investors seem to not be overly concerned with the details. But if, and when, the momentum stops, these numbers will gain a lot more significance, and might actually be important at helping to value the shares. You can see that despite there being good and bad news facing Netflix, investors seem to be discounting all the negatives. And in 2013, that was absolutely the right thing to do. Despite a wall of worry facing the stock going into the year, Netflix was one of the best large cap performers in the NASDAQ. But alas, the question on everybody's minds is, what will happen in 2014?

The Counter-Intuitive Sell Signal

For a momentum stock like Netflix, the best time to buy is when everybody is selling. By that same logic, the best time to liquidate, is when everybody else is buying. Now, this kind of reasoning is hardly scientific. Nuance and anecdotal evidence is your best friend with any momentum play. And usually the best place to start looking for answers is by glancing at analyst opinions.

The chart below summarizes the analyst opinions issued in the month of November and December 2012. We will soon see how the analysts have been helping us gain a clear view to the future on Netflix share prices.

Date

Firm

Action

Rating

Price Target

Old -> New

12/17/2012

Cantor Fitzgerald

Boost Price Target

Buy

$85.00 -> $110.00

12/12/2012

Morgan Stanley

Boost Price Target

Overweight

$80.00 -> $105.00

12/6/2012

Caris & Co.

Downgrade

Average -> Average

$59.00 -> $60.00

12/5/2012

Wedbush

Reiterated Rating

Underperform

$45.00

12/5/2012

Piper Jaffray

Reiterated Rating

Neutral

 

12/5/2012

Bank of America

Reiterated Rating

Underperform

$60.00

11/27/2012

Cowen & Company

Initiated Coverage

Neutral

 

11/16/2012

Albert Fried & Co

Initiated Coverage

Market Perform

 

11/7/2012

Cantor Fitzgerald

Reiterated Rating

Buy

$68.00 -> $85.00

11/1/2012

Oppenheimer

Downgrade

Outperform -> Market Perform

$80.00

AnalystRatings.net

As you can clearly see, going into 2013, analysts were not expecting much from the company. In November and December of 2012, Netflix shares were trading in the humble $80 to $90 range. From the above chart, it would seem like none of the analysts were particularly bullish on the company. Most expected the share price to remain relatively stagnant. Wedbush and Bank of America expected a substantial fall and rated the company Underperform. Cantor Fitzgerald was perhaps the most excited, and that firm only expected the shares to rise to about $110.

In the end, all the analysts were absolutely wrong. Investors felt that Netflix shares were extremely undervalued and the stock price shot up to almost $400, completely destroying all estimates.

To be sure, there were a lot of events which played out in 2013 which helped drive the share prices higher. The large and high profile position amassed by hedge fund guru Carl Icahn definitely was not expected and played a major role in driving momentum. But ultimately, I speculate that the indifferent sentiment and deep undervaluation of the shares going into the start of 2013 was best projected by the congregation of negative to neutral analyst opinions surrounding the stock. The overall negativity towards the company was a clear, albeit counter-intuitive, buy signal. And we have the short sighted analysts to thank for that.

The next chart will show the current analyst opinions on Netflix, from October, November and December of this year. You will see that once again, analysts are all seemingly voicing the same opinion, despite Netflix shares trading at close to an all time high, and massively stretched valuations.

Date

Firm

Action

Rating

Price Target

Old -> New

12/19/2013

Bank of America.

Reiterated Rating

Buy

 

12/11/2013

Citigroup Inc.

Set Price Target

Neutral

$355.00 -> $390.00

12/5/2013

Zacks

Upgrade

Neutral -> Outperform

$428.00

11/1/2013

Robert W. Baird

Upgrade

Neutral -> Outperform

$383.00 -> $420.00

10/25/2013

FBR Capital Markets

Initiated Coverage

Market Perform

$350.00

10/23/2013

Macquarie

Boost Price Target

Neutral

$300.00 -> $375.00

10/22/2013

Goldman Sachs

Boost Price Target

Neutral

$315.00 -> $360.00

10/22/2013

Cowen & Co

Boost Price Target

 

$191.00 -> $333.00

10/22/2013

Citigroup Inc.

Boost Price Target

Hold

$235.00 -> $355.00

10/22/2013

Cantor Fitzgerald

Boost Price Target

Hold

$260.00 -> $350.00

10/22/2013

BMO Capital Markets

Boost Price Target

Market Perform

$236.00 -> $370.00

10/22/2013

UBS AG

Boost Price Target

Market Perform

$370.00

AnalystRatings.net

Once again, we are seeing the clear signal of an overcrowded trade. A bevy of price target boosts chased the stock price up as the year came to a close. Citigroup boosted the price target on the company twice in less than two months. Even the firms which only have a Neutral or Hold rating on the shares have raised their price targets by $50 to $100 per share, expecting the average share prices to stay at about their current level or to jump even further, into the $400 range. And according to NASDAQ.com, there are only two analysts which rate Netflix a sell; while twenty different firms have a Hold, Buy or Strong Buy recommendation on the shares.

Conclusion

The naysayer will eagerly proclaim that analysts simply have no idea about where stock prices will go in the future. I cannot directly refute that assertion, but I am a believer that with momentum stocks like Netflix, large biases in opinion can often be used to signal over-extensions in stock prices. While analysts might not have the ability to see the future, if we look at the herd of similar opinions we can spot a crowded trade. We can conclude that the tide of momentum, usually based on the idea of buying an overpriced stock now, with the hope of selling within a very short time for an even higher price, might be ready to turn. Just as Netflix did the exact opposite of what everybody was expecting in 2013, investors should be prepared for an equally shocking surprise in 2014. Looking at analyst opinions from a counter intuitive standpoint might provide the average Netflix shareholder with some very valuable insight into the future share price performance.

Source: Netflix - This Odd Signal Lead To My Selling