How painful it must be for an analyst to say, "We have been consistently wrong about this stock," yet that's how Michael Pachter, a real smart guy, starts his research piece reiterating his "Sell' of Netflix (NFLX) stock Wednesday.
He then goes on, though, to say he has been consistent in valuing the company based on the discounted present value.
You know what?
I am thrilled that he is honest enough to say he has been consistently wrong since he slapped a sell on the stock three years ago when Netflix traded at $63.49. It is now at $158.
But I am dismayed that he is sticking by his methodology that caused him and his acolytes to miss almost 100 points in this stock. He writes: "We have consistently valued stocks under our coverage based upon the discounted present value of their future cash flows."
That, my friends, reminds me of the definition of insanity, doing the same thing over and over again expecting different results, as Albert Einstein once informed us. It's been obvious for ages that Netflix, the stock, doesn't fit into the four-walled paradigm of discounted present value any more than Jackson Pollock or Roy Lichtenstein paintings fit into the paradigm of realist or even impressionist works. The artistic equivalent of Pachter would deny the $165 million price that a Lichtenstein went for or the $140 million that a Pollock traded at. You see, at a certain point, if your prism is wrong, you need a new prism.
I don't mean to pick on Pachter, even as I like how that sounds. But periodically there are stocks that defy the traditional metrics and you have to scrap those metrics. Netflix trades, as you would know from UBS' preview report today, on content tracking and subscriber growth. You literally would have to estimate how content drives subs worldwide and for that, UBS is helped by its UBS Evidence Lab, which, while sounding like NCIS UBS, is really an articulate way to measure downloads and worldwide loosely based on successes like 13 Reasons Why, House of Cards and Orange Is the New Black.
When I interviewed CEO Reid Hastings in one of my trips to San Francisco, he explained that one of the great secrets behind the immense love for Netflix has to do with how few series are ever canceled. Wedbush's Pachter seizes on how there have been some cancellations of late, which does call into question its gigantic content budget, north of $6 billion for 2017, substantially more than its competitors, so it can't afford failures. "Spotty execution" for expensive originals, Pacheter points out, does put the future at risk as the company does burn a lot of cash.
I say that given all the original content the company puts out, the failures will have to increase. That's the law of large content, so to speak. Still, the record is darned good, much better than everyone else and that matters, especially when worldwide numbers are at stake and some content plays extraordinarily well in other countries and does boost sign-ups. I always remember Hastings telling me they produce films by matching what worked with what can work, as in "if you liked Scarface you will like Narcos."
At any given time, there are stocks in the market that can't be valued by traditional metrics as you will miss the big picture. Right now there are three: Amazon (AMZN) , Tesla (TSLA) and Netflix. Amazon has made it difficult to judge what it's worth because how much will you pay for world domination both in retail and in web services. If Tesla's a tech company, not a car company, maybe the valuation can be justified. Netflix? Content and sign-ups.
Knowing the metric has always been the key to stock-picking performance. Wedbush has clearly picked the wrong metric. Sometimes that's all that matters.
Originally published July 12 at 11:36 a.m. EST. on RealMoney.
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