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Netflix Still Not Getting It Right

Not only does the firm face headwinds in the United States, but we view its push for international expansion as a long-term money loser.

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 Netflix's (NFLX) wild ride continues. During the last 18 months, we have made two successful 1-star calls on its stock. The first as it ran from $150 to $300, then again after the "great fall" of 2011, when the shares hit our 4-star rating at $62 in November 2011 and triggered our 1-star rating at $125 two months later. We recently lowered our fair value estimate to $55 per share from $80, which would make Netflix a 1-star call if the stock price increased to around $85.

We arrived at our new fair value estimate after lowering our long-term assumptions for subscribers and profitability. Our $55 fair value estimate implies forward 2013 price/earnings of about 50 times. Admittedly, short-term earnings per share estimates are difficult to predict given Netflix's new business model and various moving parts in the cost structure. But we believe Netflix's business model is flawed as most of the economic rents flow through to the content owners, and we see the international business acting as a drag on earnings and cash flow.

Michael Corty does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.