Contrarian View on Netflix Is Laughable Now

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I have been reading up on the sell-side reports on Netflix (NFLX) this morning and one jumped out at me. The report from Wedbush, where the analyst still maintained a $40 price target and Underperform rating on the shares, after being wrong for the longest time ever on the company.

After reading the report it's hard not to feel sorry for the guy.

His explanation was plain ridiculous. He says in the report, "NFLX share price remains a mystery to us as well," adding that investors value subscriber growth more than earnings or cash flow. By adding the "as well" he was trying to fool himself and others that there were only a handful of others who were long the stock and the majority were like him, sitting around shaking their heads. In reality, however, the opposite is true.

I am not going to go over my reasons for being involved from the long side in Netflix since you can just read Jim Cramer's article from earlier this morning, which explains the stickiness and "must have" proposition NFLX presents both as an investment opportunity and a service.

However, what I was interested in was seeing if the Wedbush analyst had an argument or three that would make sense and convince me to sell my shares. I read the report a couple of times and could find no reason whatsoever for his investment point of view. Actually, I should say disinvestment point of view.

Look, I have worked a couple of years on the sell side and I know how difficult it is. The analyst's compensation is not just a salary (however fat it might be) but also depends on the commissions his/her reports generate. There is tremendous pressure to make calls on a stock or sector that will give the brokers an intelligent argument to make to their clients for a trade -- a position in the light or in the dark (aka long or short) that will generate money for the firm. There's nothing wrong with that at all.

When an analyst makes a contrarian call backed by an intelligent thesis, the brokers at his firm can't/don't/won't stop making calls to their clients because they can see or agree with his contrarian call and they can also see their commissions shoot up.

Maybe the first time the Wedbush analyst went against the grain his brokers were absolutely thrilled with the contrarian approach to Netflix. The commissions generated might have been huge the first time he made that negative call on the shares. Maybe a lot of the firm's clients even listened and even called the analyst to congratulate him on his out-of-the-box thinking.

Heck, maybe the second time he put out a negative thesis on the shares backed by another one or two intelligent factoids, the brokers were yet again manning the phones and dialing their clients like there was no tomorrow. Again, maybe clients were pleased, but not as pleased as the first time around.

However, now, this contrarian call on Netflix comes across as just nutty. Being wrong for so long, and still not throwing in the towel, even after the jaw-dropping subscriber additions (which is the entire thesis for investment in NFLX at this point, rightly or wrongly) last night.

Now, let's say NFLX goes to $120 in the future and then corrects a whopping 50% from there (not happening unless all heck breaks loose in the markets), so at that point the shares are trading around $60. His price target is still $40.

Again, at first, the analyst might have be applauded for his contrarian approach, but that is not likely the case anymore.

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