Goldman Finally Upgrades Netflix Stock -- but Is It Too Late?

NEW YORK (TheStreet) -- If investors needed another reason to be skeptical of Wall Street and sell-side analysts, Goldman Sachs' upgrade of Netflix (NFLX) Tuesday from neutral to buy is yet another prime example.

TheStreet's Chris Ciaccia profiled Goldman Sachs analyst Heath Terry in "Why Goldman Sachs Thinks Netflix Is Worth $590 a Share." Terry upped his rating on the company based on essentially no additional news since the company reported first quarter earnings on April 23. He cited international expansion as the primary driver for the new rating and price target. 

Where was this upgrade in April, when Netflix reported that the number of international subscribers doubled in two years' time? In fact, over those two years, growth in international streaming membership has averaged nearly 20% per quarter compared to just over 5% per quarter in the domestic streaming membership segment.

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Netflix's intention to continue international expansion into France and Germany this year -- and other countries further down the road -- was announced months ago. As internet access and mobile devices become more prevalent throughout the world, particularly in emerging markets, Netflix should easily be able to expand its subscriber base given the worldwide appeal of television and movies.

Again, nothing new since April.

Investors should approach this action with skepticism. 

It is well-known that Wall Street analysts very rarely offer sell recommendations and are biased toward buy and neutral ratings. In fact, it is often said on Wall Street that a hold rating is essentially a sell rating.

Moreover, Goldman's $590 price target is well above the $404 consensus price target shared by analysts on Wall Street. Many analysts have cited valuation concerns as part of their basis for hold and sell recommendations -- however few there may be.

If shares of Netflix appeared overvalued when they were $320 a share, what do they look like now, as they push $470 a share?

Before this upgrade and subsequent 7% gain, shares of Netflix had risen about 40% since their recent low back on April 28, at around $315 a share. Nothing has fundamentally changed with the company and no newsworthy events have transpired since the March and April drop-off.

So why would Goldman make this upgrade?

Inevitably, the market will sell off again as it has always done, likely causing investors to sell their high-flying momentum stocks, such as Netflix. The result will be the same -- people who buy now following a superfluous upgrade will be hurt the most.

Investors would likely be better off selling after Tuesday's gain and the previous 40% gain, which puts the shares at all-time highs.

Goldman may be legitimately late to the party. But in any case this upgrade is way too late.

Investors would be wise to be cautious of Netflix's recent rise and of this upgrade.

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At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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