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Goldman Late to the Game

Written By Brian Hicks

Posted March 15, 2011

It makes my ego (as if I have one) proud when a giant, like Goldman Sachs agrees with me… weeks after I make a call.

On February 14, 2011, we said:

When Netflix hit a high of $145, we knew $200 wouldn’t be far behind, telling readers:

“It looks like Netflix just broke above the channel… and could be headed higher. Considering future growth, an $8 billion market cap is nothing. We could see $10… even $20 billion when all is said and done with this stock. Plus, with the momentum crowd jumping in, and quickly churning that float, there’s no telling how high this can run.”

But the NFLX run, we believed, was just getting started.

And we were right… as the stock just hit $245.

But, as The Wall Street Journal reports:

“Not to be a stick in the mud, but it’s worth thinking about how far Netflix has climbed. The stock is up 287% over the last 52 weeks. In 2011 alone, the shares are up 39%. That enthusiasm has translated into nosebleedingly high valuations. The stock is trading 83 times the last twelve month’s earnings and 52 times the consensus expectations for the next 12 months, according to FactSet.

Valuations like that entail a really high amount of risk. If the growth rate of the company starts to deviate even modestly from the sizzling rate Wall Street has priced in, the stock could get hammered.

Of course, with the amount of momentum there is behind this stock, it could very well keep rising for quite some time. Just do yourself a favor and don’t bet the kid’s college fund on it, alright?”

While we agree that NFLX is extremely overbought… it’s all about the blind momentum at this point.

And it could push the stock to our new target of $300 by September.

An outrageous call? Sure.

But we were the same people that called for NFLX $200 when the stock traded at just $145.

And it seems Goldman agrees with our $300 call.

According to The Wall Street Journal:

“Goldman Sachs analysts are climbing aboard the Netflix bandwagon, after initiating the shares with a “neutral” rating back on Dec. 17. In the mean times the shares are up about 15%, versus the S&P 500′s 1.7% climb.

Here’s the rationale analyst Ingrid Chung cited for hitting the buy button now.

(1) NFLX benefits from rapid growth of online video consumption, driven by the proliferation of connected devices
– 27% of US consumers now stream TV shows/movies, up from 16% [year-over-year] according to our GS Internet Usage Survey;

(2) Netflix now has sufficient scale to make it difficult for new entrants given low price points and expensive content costs; and

(3) Competition to date has been underwhelming and we believe that demand for streaming online content could be large enough for multiple players

Previously, the Netflix watchers at Goldman had written that Comcast, Google, Hulu, Apple and Amazon would be looming as competitors. Here’s their current view:

While we do expect each of these businesses to evolve and become more competitive with Netflix over time, we view the potential impact on Netflix as more muted than we first feared, and perhaps on a longer time horizon. We believe that the demand for video streaming could be big enough to sustain multiple business models and competitors and that these models can co-exist.”

Nice of you to see things our way, Goldman. You’ve made whatever ego I have proud.