This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Greenberg: Netflix Downgrade -- Moment of Truth?

By: Herb Greenberg | 01/07/14 - 12:24 PM EST

SAN DIEGO (TheStreet) -- Whenever a bullish or bearish analyst veers from the pack, it's noteworthy. With Netflix (NFLX), it was noteworthy when Janney's longtime bear Tony Wible turned bullish just before the stock took off.

For that reason, it's equally noteworthy that longtime bull Scott Devitt (Morgan Stanley) turned bearish.

Too soon? That's what my colleague Jim Cramer said on CNBC's "Squawk on the Street" this morning. I think his exact word was, "premature."

And he may be right, but every call by every analyst, especially on a hot momentum stock, can't always be viewed as the moment of truth. It's not always about every tick of every trade. There's nothing wrong with trying to get ahead of the curve.

Momentum stocks simply can't be tied to fundamental concerns.

But sometimes, if a company has enough of a history, as Netflix does, it can be analyzed. That's just what Devitt did, in a well-reasoned report that focuses on subscriber saturation and the commoditization of "digital video distribution."

From his report:

"On the paid end of the spectrum, we think that Amazon Prime Instant Video, HBO GO, and Hulu Plus each offer compelling value to consumers and could gain momentum in 2014 as mass digital distribution is becoming commoditized and more content is becoming available for bidding. We continue to think that Netflix holds up well in comparison to these services, but since Netflix has amassed over 30MM domestic subscribers to date, we think it may be easier for its competitors to gain their next 5MM users than it will be for Netflix."

And therein lies an important point: Yes, as Jim says, the call may be premature. Who knows?! This isn't about being a hero. It's about pointing out what appears to be a looming risk, which is what Devitt did.

Reality: Netflix, at some point, will stop growing the way it has been. Competitors will gain a level of traction. Content costs will matter. When somebody who has loved the stock starts raising those kinds of red flags, especially with a stock that a market fueled by indiscriminate momentum behind its back, it's time to pay attention. I got Netflix wrong, so (it might and probably should be argued) I'm the last guy you should listen to. But I've also been around long enough to know that just as trees don't grow to the sky, neither will Netflix. If the Morgan Stanley analyst is right about Netflix, and the market loses steam, so will Netflix. If the market doesn't lose steam, but Netflix does -- all bets are off. But just remember: In 2011, when Netflix messed up, its stock plunged to $63 from $295. If nothing else, in a market where memories are like vapor, it should serve as a reminder of the risk.


-- Written by Herb Greenberg in San Diego

Follow @herbgreenberg

You can contact me at: herbonthestreet@thestreet.com.

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security.

Other Posts In Herb's A Dose of Reality:

Get More Investment Ideas:

To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.

Markets

DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 +2.54 0.14%
NASDAQ 4,095.5160 +9.2910 0.23%

Herb's Tweets

Brokerage Partners

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
Real Money Pro

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Trifecta Stocks

Trifecta Stocks analyzes over 4,000 equities weekly to find the elite 1% of stocks that pass rigorous quantitative, fundamental and technical tests.

Product Features:
  • Model portfolio
  • Trade alerts
  • Recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
Stocks Under $10

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Dividend Stock Advisor

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Breakout Stocks

Bryan Ashenberg, using sophisticated stock screening and fundamental research, identifies potentially explosive small and mid-cap stocks.

Product Features:
  • Model portfolio
  • Small-cap and mid-cap focus
  • Intraday trade alerts
  • Weekly roundups
Options Profits

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
Top Rated Stocks Top Rated Funds Top Rated ETFs