Netflix Stock Sure Does Mend Quickly

In 2002, when Wal-Mart was threatening to launch a subscriber business much like the one Netflix created, shares of the upstart DVD-by-mail company traded for less than a buck. It rebounded in a huge way, in part by launching a streaming service, and the behemoth retailer backed off.

It was the first of many times Netflix would prove its resilience, the most recent time being this week when, after it reported adding 670,000 U.S. subscribers in the second quarter after earlier predicting it would add 1.2 million, the stock sank $50 in after-hours trading, only to get half of it back in just the next two days.

It's a buying opportunity, says Cannacord Genuity analyst Michael Graham, who kept his "buy" rating on the stock but lowered his price target to $450, down from $500. The stock closed Wednesday at $375.13, giving it a market capitalization of $163 billion, about $1 billion shy of Disney's value.

CEO Reed Hastings didn't specify why there were so few additions during the quarter, beyond saying that growth varies from quarter to quarter, which doesn't mean much since Netflix missed its own guidance, let alone predictions from analysts.

Political conservatives, though, quickly took to social media to say it is because their unofficial boycott is working — activists swore off the service after Netflix signed a multiyear deal with former President Barack Obama and Michelle Obama to produce movies and TV shows and then added Obama's former national security adviser Susan Rice to its board of directors.

But that theory doesn't address that Netflix also missed guidance on a worldwide basis, adding 5.15 million to 130 million global subscribers when it had forecasted adding 6.2 million.

"After four straight quarters of soundly beating subscriber guidance that resulted in the stock more than doubling, Netflix missed its subscriber guidance modestly," said Graham.

Likewise, Tuna Amobi of CFRA Research kept his "buy" recommendation on Netflix while lowering his target price by $40 to $425, saying Netflix will rebound internationally due to strong content.

"Netflix has created a better way to watch television," said Ben Weiss, chief investment officer of 8th & Jackson Capital Management. "To compete for consumer time and money, the rest of the entertainment industry must create products that deliver as much value, variety and convenience."

And Todd Juenger of Bernstein kicked the bullishness up a notch by actually raising his target price and writing: "Everybody knew the day would someday come when Netflix would fall short of quarterly subscriber expectations. ... For the high-conviction bulls, it only matters if 130 million subs versus 131 million subs shakes their long-term confidence."

"Frustrated bears may be enjoying some log-awaited schadenfreude," he continued, but "for those who wanted an entry point, here it is."

One of those bears in Michael Pachter of Wedbush, writing that Netflix has been "drinking their own Kool-Aid" and that spending on licensed and original content — which he expects to hit about $12 billion this year — should be a red flag for investors.

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"We expect content acquisition spending to trigger substantial cash burn for many years," said Pachter.

Netflix's valuation is unwarranted because its content costs are rising at the same pace as its revenue. The stock, therefore, should fall more than 60 percent to $125 a share in the next 12 months.