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Netflix's Outlook Improves After Friending Facebook

By Jake Lynch

BOSTON ( TheStreet) -- Perennial momentum stock Netflix (NFLX - Get Report) has gone from overvalued to illogically overvalued in recent weeks, though it's down about 3% from its recent 52-week high.

The fast-growth DVD-mailer and streaming video company, led by tech guru Reed Hastings, is scheduled to report its second-quarter results on Monday. Analysts forecast that Netflix increased quarterly adjusted earnings by 40% to $1.12 and sales by 52% to $790 million.

Expectations are lofty for the fast-growth firm, which beat earnings expectations by 3.7% last quarter, a solid outperformance, but suffered a stock price drop of more than 9%, in reaction. On the whole, analysts have tempered their view of Netflix's equity, which has advanced 55% in 2011, 163% in 12 months and 1,084% in the past five years.

Currently, 13, or 41%, of the researchers covering Netflix rank its stock "buy" while 12 rate it "hold" and seven rate it "sell." Interestingly, many of Wall Street's brand-name investment banks are still bullish.

JPMorgan, recently named the best overall equity researcher based on buy-side clients' perceptions, by surveyor Greenwich Associates, has an "overweight" ranking and lofty $340 target on Netflix. Goldman Sachs expects Netflix to hit $330 and Barclays predicts a rise to $315.

Earlier in the year, Netflix was sold short by vocal long-short hedge fund manager Whitney Tilson, who eventually sold out of his losing position. While Tilson conceded that Netflix has an outstanding business model, his thesis was predicated upon overvaluation, a relevant criticism of a stock that currently costs 44 times forward earnings and 48 times cash flow, enormous market premiums.

Tilson made other salient points about Netflix, especially its previously low-cost streaming contracts, which are unlikely to be renewed, as proven in contract renegotiations.

Goldman turned decidedly bullish on Netflix in April when it downgraded its view of the streaming competition posed by the likes of Google (GOOG - Get Report), Amazon (AMZN) and Apple (AAPL - Get Report). JPMorgan is similarly unimpressed with competitive threats, especially now that Netflix has inked a partnership with privately-held Facebook. JPMorgan sees tremendous growth, domestically, still, given that Netflix's "current penetration is ~30% of broadband subscribers." That figure has plenty of upside.
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