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Reed Hastings Hypnotizes Wall St. Analysts

Tickers in this article: NFLX
NEW YORK ( TheStreet) -- In 2011, a large number of Wall Street analysts made fools of themselves. We're not just talking at the standard level we have come to expect.

I hate to pick on one person, but, in 2011, she became emblematic of the horrid analyst coverage of Netflix . Ingrid Chung, Goldman Sachs, December 1, 2011, as depicted in an article I wrote for Seeking Alpha:

For example, has anybody heard from Ingrid Chung at Goldman Sachs . . . After Netflix's disastrous Q2 and weak Q3 guidance in July, Chung waxed bullishly, not only reiterating a buy rating and her $330 price target, but raising EPS estimates from 2011 through 2013.
Before you read this next sentence, call some family, friends or co-workers over to your computer screen, because there's nothing like sharing a laugh with others around the holidays. For 2012, Chung predicted Netflix would post EPS of $7.69.

For the record, Netflix recorded 2012 EPS of $0.29.

Just this past week, Andy Hargreaves, an analyst at Pacific Crest upped his NFLX price target to $225 and raised 2015 and 2021 subscriber and earnings estimates. While I don't necessarily disagree with the price target -- remember, I have been bullish the stock since last summer -- or the notion that Netflix employs a smarter content acquisition strategy than it used to, I can't get with the contention that Netflix's investment in what Hargreaves calls "high-quality original content" will do anything but bankrupt the company.


How soon we forget Netflix's precarious financial situation. In fact, some of these analysts have never even acknowledged it. Not even after 2011 and 2012's implosions. It hasn't gotten any better. Netflix will still require some sort of bailout -- again -- if it expects to continue operations at anything close to the current pace.

See if you notice a pattern in this series of numbers: $194,499, $150,419, $175,207, $159,199, $508,053, $395,992, $402,251, $370,298, $290,291. Those numbers represent, in chronological order (and in thousands), Netflix's cash and cash equivalents over the last nine quarters, ranging from the quarter ending Dec. 31, 2010, to the most recent reported quarter ending Dec. 31, 2012 (see Netflix's Q4 2012 financial statement at the company's investor relations Web site).

That pop -- from $159,199 to $508,053 -- came when Netflix had to hit the market for extra cash at the end of 2011 as things really began to unravel. At the time, Reed Hastings claims Netflix really didn't need to raise cash; it just did so to give itself a cushion.


In the company's most recent letter to shareholders (January 2013), Hastings stated that Netflix would merely take "advantage of the current low interest rate environment to refinance our $200 million in outstanding notes and raise additional cash through new debt financing."