Could you have nailed the huge Netflix (NFLX) gain that we are seeing today? Was it accessible? Could those 60 points in after-hours trading have been yours?
So many times we have been blindsided by the good or the bad that we often marvel how analysts could be so wrong. How did they miss the SanDisk (SNDK) and Tiffany (TIF) shortfalls? How could they have not realized that oil was coming down hard and fast? What didn't they see about how Lululemon (LULU) was turning around or how CVS (CVS) was doing so much better than expected?
But Netflix? Nope, this one was not only available but not one but two analysts nailed the thing, and nailed it perfectly, upgrading the stock and urging you to buy ahead of the quarter. The work, done by John Blackledge at Cowen and Scott Devitt at Stifel was exemplary and worth praising to the skies, because you had plenty of opportunity to act on their upgrades, both of which were rolled out when the stock was at $323.
What did they see?
First, the Cowen piece involved some intense research, a survey of 1000 U.S. citizens that showed a dramatic increase in time spent on Netflix, largely because of original content and therefore a willingness to pay more for Netflix membership. Netflix's pricing power has continued to increase over time, Cowen said, because of greater awareness about these new programs, including the critically panned Marco Polo. In fact the survey showed that more Netflix users watched Marco Polo than House of Cards, 14% versus 10%, and a virtuous cycle of high quality content would continue to drive subs. Plus, the desire for more binge-watching of Netflix programming showed that price increases won't be a problem, and that could mean a dramatic increase in profitability.
Although this piece didn't nail the dramatic increase in international subs, which took total subs to an astounding 57 million, it sure made you want to buy the stock and while the potential price hike didn't figure in to the shareholder letter or post-letter conversation with analysts, the strength of the original programming did propel subs. Smart survey. Brilliant work. Well done.
Stifel's Devitt put out a piece that sounded fanciful at the time saying that in the low $300s Netflix offered a "compelling risk-reward ratio," because of its strong content cycle and he put the base case price target at $380 and the bull case at $450. He keyed on a resumption of international growth and strong content cycle. He made a judgment that the huge increase in original programming would drive subscriptions aggressively, and it would be a very inexpensive way to add the subs because original programming costs so much less than bought programming and resonated better with the viewers.
He even put out a number that sounded ridiculous at the time -- the time being last week -- of 100 million subs by 2018.
Now Netflix is projecting 61 million subs by the end of this year, so the 2018 target of 100 million might be a stretch. But the good news here is that in the shareholder letter CEO Reid Hastings says that, because of the low cost of original programming and the ability to get people to sign up at reasonable prices -- which I think means higher prices than now -- the company will show "material global profitability in 2017." In other words, this will not be Amazon (AMZN). There will be no profitless prosperity.
Frankly, I don't care how Cowen or Stifel got to why you should buy; the truth is that either report offered enough compelling evidence to make you want to pull the trigger and the forecasts were just right enough to do that. I say congratulations are in order all around, from Netflix's shrewd management to these two very smart analysts who would have made you a ton of money if you acted on their recommendations.