Friday, July 23, 2010

The Least Helpful Call You Will Get All Month


When identifying which particularly silly opinion offered by one of Wall Street’s Finest that might qualify as the “Least Helpful Call You Will Get,” we here at NotMakingThisUp usually confine the timeframe to the current 24-hour day.

After all, Wall Street’s Finest offer so many silly opinions every Monday through Friday that declaring any single “Least Helpful Call” as encompassing more than one day would be impossible.

Or so we thought, until this week when a loyal, sharp-eyed reader identified a particularly silly call that qualifies as being, if not one for the ages—and it is right up there—then certainly the Least Helpful Call You Will Get All Month.

What makes this call especially stand out is that we are in the middle of quarterly earnings season, which means that Wall Street’s Finest are issuing silly commentary, calls and conclusions on so many different companies that it resembles a sketch from Monty Python.

Specifically, the “Election Night Special” sketch, which featured political candidates from the Silly Party, the Slightly Silly Party, and the Very Silly Party—candidates bearing names such as Kevin Phillips-Bong, Jethro Q. Walrustitty and, our favorite, “Tarquin Lim Fin-tim-lin-bin-whin-bim-lim-bus-stop-Ptang-Ptang-Olé-Biscuitbarrel.”

Indeed, when we first read the “Least Helpful Call” under discussion, it seemed to us the author might very well have been named “Tarquin Lim Fin-tim-lin-bin-whin-bim-lim-bus-stop-Ptang-Ptang-Olé-Biscuitbarrel.”

Alas, it was not. In fact it comes from a firm with the not-at-all silly name 'Credit Suisse,' and it concerns Netflix.

Netflix, for those who haven’t kept track, is the purveyor of DVDs-by-mail that cleverly moved into DVDs-by-WiFi, thus becoming one of the iPad’s most popular—and profitable—applications, and one of Wall Street’s most popular stocks.

Now we have no opinion on Netflix’s stock price. But a glance at our Bloomberg shows that Netflix shares (ticker NFLX) have been on a tear for the last year, tripling from the $40 area last September (when the company began reporting double-digit earnings upsides), to $120 just a few days ago, before a less-than-satisfactory earnings reports whacked the stock back down to $103.

Perhaps Credit Suisse has been stingy on paying for Bloomberg terminals, or for real-time quote information. Or it could be that their analyst on the Netflix case hasn’t been paying attention to the business. Or it could be all-the-above.

Whatever it is, Credit Suisse has carried an “Underperform” rating on Netflix since well before the stock began outperforming in a meaningful way last summer, with a “Target Price” that was, as it turned out, a little conservative.

And by that we mean that until three days ago, the “Target Price” carried by Credit Suisse on Netflix’s shares stood at $31 a share.

So what better time to change that stale “Target Price” than a setback in the stock after disappointing earnings?

And so it was that Credit Suisse this week took the opportunity to raise its “Target Price” (but not its “Underperform” rating), in what is surely the Least Helpful Call of July 2010.

Noting that Netflix “reported solid 2Q10 results” and was experiencing “rising sales of NFLX streaming-enabled devices couple with increasing uptake” of its service, the analyst wrote the following:

“NFLX has done an excellent job of late in ramping subscriber growth (above expectations), as well as growing revenue and earnings faster than expected, which has been reflected in share price levels. Boosting our longer-term operating estimates, namely subscriber growth, yielded higher long-term topline and cash flow growth, as well as a higher DCF value.”

How much “higher” was this “DCF value”? Three-times higher.

That’s right:

“As a result, we are boosting our target price to $90 (from $31).”

And that, we are fairly certain, will be the Least Helpful Call You Will Get This Month.



Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

3 comments:

texalope said...

Check out the JPM call on ATPG. The analyst made a $500 million dollar error on a $450 million market cap stock.

Craig said...

NFLX is a tough one. I sold in the 40's from fear of heights more than anything. Some interesting short theses were floating around, probably influenced me.

In defense of the analyst, "when the facts change..." you know the rest.

Colin P said...

At least he had a negative opinion. I would rather see an overly pessimistic analyst than an overly optimistic one.