Netflix Shows Wall Street Can Be Awful Place

NEW YORK ( TheStreet) -- The more feedback I receive from last week's CNBC appearance where I cross-checked a Wall Street analyst for his "thin" and "incoherent" Netflix ( NFLX) bull case, the more I realize, against instinct, I made the correct choice to set decorum aside and situate him in his proper place.

These Tweets accurately represent about 85-90 percent of the response I have received:

It's refreshing to hear the sort of sentiment that says it's not about being right or wrong, but how you get to the conviction you run with. Right and wrong, particularly with battleground companies, can be fleeting propositions. The same applies to stocks, but stocks and companies really require two different discussions.

It's quite clear that, even when they're right (as bulls are about NFLX the stock), the public doesn't necessarily trust that Wall Street analysts provide a complete picture, let alone the level of rigorous analysis we should expect from them.

I have already established that Barton Crockett of Lazard Capital Markets had some nerve referring to my points on Netflix as "thin" when his were vague and imprecise generalities and lofty predictions supported by leaps of faith rather than logic.

It's important to drill down to just how flimsy the core of his NFLX "bull case" is.

Consider this 31-second segment that sums up Crockett's contention that we should treat Netflix like companies that command high margins such as Time Warner's ( TWX) HBO and big media conglomerates Viacom ( VIAB) and Discovery Communications ( DISCA):

As I have repeated over the years -- and more so recently -- there's a valid bull case to be made for Netflix, the company. I don't buy it. I don't believe in it. I constantly counter it. That, however, doesn't mean it's wrong. If the assumptions people make about Netflix, the company, pan out, the magic carpet ride the stock has ridden will prove to have been a time machine.

That said, any way you slice it, Crockett's margin argument makes absolutely no sense. Let's deconstruct it as clearly and simply as we can.

Crockett tells us that because Netflix does original content and some exclusive programming it's a TV network in the spirit of HBO or the entities that operate within Viacom, Discovery and such. As an aside, many Netflix advocates claim it's just the opposite of a traditional television network because of its delivery mechanisms, on-demand nature and so on. With Netflix, you apparently can have it both ways.

Pesky technicalities aside (I won't even bring up contribution margin!), Crockett could be correct. Netflix's margins might continue to rise. But that's all he'll be right about. He'll take credit for getting to the finish line even though a reality other than the one he imagined will have run the marathon.

Carrying original and/or exclusive programming doesn't directly drive margins at any of these companies. Again, we see a sloppy leap of logic from one of Wall Street's "senior" analysts.

Subscription revenue from individuals drives Netflix's revenue. That's it. At HBO, fees it collects from cable and satellite companies drive revenue. At the networks of Viacom, Discovery and others, these same fees and advertising dollars drive revenue. Given the obviously distinct business models, I'm not sure how a serious Wall Street analyst or even part-time hobbyist investor could make the case for Netflix margins using HBO, Viacom and Discovery as examples.

Certainly the programming gets these companies into a position to succeed -- possibly -- but it's simply not the direct mechanism that drives margins. It's how your model and cost structure takes the content you serve and monetizes it.

To say investors attribute high margins to HBO (or, more specifically, TWX), Viacom and Discovery and therefore they can, should and will, over time, do the same for Netflix makes zero sense. It's so inconsistent that, frankly, it should disqualify Crockett from ever commenting on the company or the media space again. In fact, Lazard Capital should make him take his driving test again. Particularly if he refuses to provide context for his claims. He had the opportunity early on in the CNBC interview, but capitulated and changed the subject.

If this was merely about the future of Netflix, it wouldn't matter much. But there's a bigger picture issue that looms large.

An analyst from a major firm sent me the following via email after my appearance on CNBC. I changed the exact wording to protect the analyst's identity, but preserved the meaning of the comments:
I share your pain ... am embarrassed by some of my own peers. I lived through the dot-com bust and accounting issues at ... I only wish some were more thorough.

If I just took off on a guy for the sake of taking off on him, I would have, rightfully, received negative reaction. But I'm convinced investors and those who follow the stock market and/or companies want to see the culture Wall Street analysts operate under stirred and shaken.

Collectively, we -- the media and, to a lesser extent, you -- have allowed an atmosphere to persist where it's more about touting and driving stocks while building a one-sided case, not researching the various faces of public companies. We have become desensitized to how toxic of an arrangement this is.

If nothing else, in some small corner of our universe, I hope the Netflix issue can trigger a conversation about the way Wall Street conducts itself, particularly as analysts morph into pseudo-media celebrities, forced to to speak, out of their element, in 31-second sound bytes.

-- Written by Rocco Pendola in Santa Monica, Calif.
Rocco Pendola is a columnist and TheStreet's Director of Social Media. Pendola makes frequent appearances on national television networks such as CNN and CNBC as well as TheStreet TV. Whenever possible, Pendola uses hockey, Springsteen or Southern California references in his work. He lives in Santa Monica.

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