Netflix (NFLX) shares climbed more than 11 points on Tuesday to an all-time high of $577.10 after BofA’s (BAC) analysis team, led by Nat Schindler, upgraded the stock from ‘Underperform’ to ‘Buy’, and raised ticker’s price target from $350 to $722, implying 106% expected upside. In addition to more than doubling his PT, Schindler also increased FY/16 EPS estimates from $1.96 – $4.32/shr, based on “improved marketing and content costs from global original content licensing.”
But for Michael Pachter, the Wedbush analyst covering Netflix, the new rating underlines everything that’s wrong with modern stock analysis.
“The sell-side has denigrated to an institution that simply tells you which direction a stock has been moving. They’re momentum players,” he said in a phone interview with CNBC. “All that you need to do to value a company as a sell-side analyst is look at a stock chart.”
According to Pachter, who holds an ‘Underperform’ rating on the stock, and currently has a 12-month base case estimate of $270, the bulls are not factoring in something very fundamental about the Netflix story: content costs, which are set to increase dramatically.
“They’re going to have to pay up, and they will not be compensated by subscriber growth. People are discounting that competition effect,” Pachter said.
Tuesday on CNBC, Jim Cramer called the BofA call “an extraordinary reversal of how a guy feels about a stock,” noting that investors who react positively to the ultra-bullish NFLX upgrade are just eating crow.
“Let’s just say, if you’re want to eat crow, you might as well eat the tree of crows that we saw in the movie The Birds,” Cramer said.
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