| | | An analyst call from nine and a half years ago:
Analyst cuts Netflix target to $3
Says company still underestimates Blockbuster
By Herb Greenberg, MarketWatch
Jan. 25, 2005, 12:50 p.m. EST
SAN DIEGO (MarketWatch) -- Wedbush Morgan analyst Michael Pachter already had a "sell" on Netflix going into the company's report of fourth-quarter results. Tuesday his firm added the DVD rental company to its "focus list" as a recommended short sale with a $3 target. Arch-rival Blockbuster is on the list as a "buy."
As I noted Monday, Netflix officials conceded on an earnings call that they had "underestimated" the competitive threat of Blockbuster . The company then went on an all-out assault of Blockbuster, saying that Blockbuster could hurt its ability to comply with debt covenants if it continues on its current competitive course with Netflix. Blockbuster responded: "That is a ridiculous, unfounded response by a concerned competitor."
Pachter agrees in a note to clients, saying, "Netflix continues to underestimate Blockbuster's market position." He says that over time, he believes Blockbuster will attract more than half of all online DVD rental customers.
Blockbuster, he says, has a lower cost structure than Netflix for online rentals. "This cost advantage will be fully leveraged once Blockbuster migrates fulfillment to the store level," he says.
If that happens, Pachter estimates that Blockbuster will have at least a $2 cost advantage over Netflix per customer each month, "primarily due to lower overall inventory costs."
Pachter also said he was surprised Netflix mentioned the possibility that Blockbuster's competitive challenge could impact its debt covenants. "We note that these same banks are apparently willing to lend Blockbuster an additional $1 billion or more in pursuit of Hollywood Entertainment," he says, "and we think that Netflix management is mistaken in its assessment of Blockbuster's financial health."
He also says that investors "misperceive" the potential in the online DVD rental business by Amazon. "Amazon intends to enter only if it can find a suitable fulfillment partner," he said. Considering that Amazon tends to link up with brick-and-mortar retailers, he says the most suitable partner would be Blockbuster.
Assuming Amazon really enters the business. Analyst Alden Mahabir of Vintage Research, who also has a "sell" on Netflix, isn't sure Amazon will make a full-blown leap into such a difficult business. "Until détente is reached or a competitor falls, we question whether the market has room for another," he writes. However, he also thinks Netflix's economics continue to erode and has cut his price target to $7.50 from $8.
And this note: In Monday's item on Netflix I mentioned earnings came it at the low-end of lowered guidance. Make that the high-end.
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