Market trading saw heavy hitter Netflix dropping this morning.  Much like the any good retail sale, unexpected drops on strong stocks like these question whether there’s an opportunity to buy or if they really are out of season and should stay on the rack.

Netflix is down about 5% this morning after a downgrade by Morgan Stanley from equal weight to underweight.  Along with the downgrade, MS lowered the price target to $310 (from $333), representing a 14% decrease from yesterday’s closing price of $360. This also comes on the heels of Netflix’s being named the best performing S&P 500 stock of 2013, at a 300% gain for the year.  This news may be compounding investors fears of a cooling off period following such a bounce.

Morgan Stanley’s reasoning for the downgrade is they believe Wall Street’s long-term U.S. subscription forecasts for Netflix are at risk.  They see increasing competition from Amazon, HBOGO, and Hulu Plus as a threat.  They also noted that “Even if Netflix’s churn levels (churn = rate of subscribers they lose per year) fall to record lows, we estimate that over 48MM out of 92MM residential broadband households (~53%) would need to watch Netflix over the next 12 months to meet our 2014E domestic sub forecast of 39M. If monthly churn is closer Netflix’s long-term average of ~4%, the number of households would need to reach ~52M (~57%).”

While I agree competitors are a factor, I think Netflix’s drop may present a short-term buying opportunity.  At least until the company reports 4th quarter earnings on Jan. 22.  Netflix’s Q4 results were its best in 2012, since Netflix was able to add 2 million subscribers when consumers got new tablets and PCs for Christmas.  Results won’t necessarily be the same this year, but it’s likely the trend continued.

Further, I think Netflix will get a boost from the awards season.  Netflix has proven it can produce quality original content (Orange is the New Black is out of control), and is up for 6 Golden Globe awards in January.  New seasons are starting soon and awards show wins may convince consumers to subscribe solely for these shows.  Seeking Alpha just published a good article on this trend, plus other avenues of growth via new pricing models and partnerships.

Overall, I think the downgrade presents an opportunity.  I would keep a close eye on price today and tomorrow to see whether it drops a bit more.


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