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Netflix, HomeAway Analysts Admit They Were Wrong

BOSTON (TheStreet) -- A mea culpa from a Wall Street analyst is a rarity. Two admissions of error in the same day, like the ones investors saw this morning on high-fliers Netflix (NFLX) and HomeAway (AWAY), are the stock-market equivalent of Halley's Comet.

The analysts' errors aren't on the same level as the reported $2 trillion mistake Standard & Poor's made when downgrading the triple-A rating on U.S. debt. Still, they're a breath of fresh air on Wall Street, where miscalculations are never so publicly noted.

On Wednesday, Goldman Sachs analyst Ingrid Chung was forced to correct a previous research report on Internet vacation rental company HomeAway due to an error in the fully diluted share count. Chung says she originally counted 49 million fully diluted shares for 2011, 60 million for 2012 and 61 million for 2013. Those incorrect totals were revised higher to 63 million, 88 million and 89 million, respectively.

Due to the modeling error, Chung cut her estimates for HomeAway's 2011, 2012 and 2013 earnings per share to reflect the fully diluted share totals. HomeAway still remains one of Chung's favorite companies in the Internet industry, but the six-month price target was revised to $42 from $48.

Meanwhile, Oppenheimer analyst Jason Helfstein corrected an error in fourth-quarter subscriber estimates for Netflix. Due to a mistake in his model, Helfstein expected Netflix to see U.S. subscriber growth increase 75% in the fourth quarter from a year earlier. That has now been revised to only 40%. In September, Netflix revised its subscriber growth targets lower by 1 million, citing a move to raise prices on some services.

While the subscriber revision has little effect on estimates for the fourth quarter, Helfstein's forecasts for 2012 revenue, non-GAAP earnings per share, and earnings before interest, taxes, depreciation and amortization, or EBITDA, declined by 9%, 21% and 18%, respectively.

"In addition, we have increased our discount rate to 15% from 11%, to reflect the increased risk associated with [management's] volatile decision making," Helfstein writes, a reference to Netflix CEO Reed Hastings' decision to spin off the company's DVD-by-mail business into Qwikster, a plan the company scrapped this week.

Helfstein doesn't get off scot-free, though. While his admission of error garners some applause, his price target on Netflix still deserves scrutiny. Until today, Helfstein had maintained a price target of $270 for Netflix, a level not seen since July.

Now, Helfstein has a price target of $185 for Netflix, a 31% decrease from his previous target. Too bad Netflix shares are down 60% in only three months. Helfstein also admits that while his 2012 EBITDA and GAAP EPS estimates are 7% and 14% below the consensus, respectively, "investors widely expect a reduction in Street estimates, following the report of third-quarter results."

Perhaps there are more another mea culpas in the making.

-- Written by Robert Holmes in Boston.



>To contact the writer of this article, click here: Robert Holmes.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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