Netflix: A Tale of 'Unrealistic Expectations'

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NEW YORK (TheStreet) -- Netflix shares dropped 1.57% in early Tuesday trading to $212.22 on a rather precarious downgrade.

Bernstein analyst Carlos Kirjner downgraded shares to "underperform" from "market perform," but raised his price target to $180 from $125, noting the share price reflects "unrealistic expectations across all major economic and strategic levers of the business."

Shares of Netflix have been an unbelievable performer this year, gaining 132.85% year-to-date, compared to a 9.98% gain in the Nasdaq.

Netflix posted exceptionally strong first-quarter earnings, and the momentum since then has continued, as reflected in the stock. However, Kirjner thinks things have gone too far, too fast.

As of the end of the first-quarter, Netflix had over 36 million streaming subscribers, up 3.05 million from the previous quarter. Kirjner believes that number could grow to 43 million, and margins could continue to expand to 32%, but the share price is acting as if numbers will reach at least 50 million streaming subscribers, with margins closer to 40%. "We think the limits imposed by the actual size of Netflix's truly addressable domestic market, growing competition, and diminishing returns on incremental content investment will become clear in 2014 and hence we downgrade the stock and set a 12-month price target of $180," Kirjner wrote in the report.

Netflix has been a battleground stock for years, fueled by the rapid rise a few years ago to near $300 per share in the summer of 2011, then only to see the price drop below $60 per share almost a year later, in 2012. The addressable market for streaming video is at most 65 million U.S. households over the next several years, but more likely around 45 million households. Netflix has captured more than half the market already, no matter which way you look at it.

When compared that to HBO (to which Netflix often compares itself), that's more than twice HBO's penetration (with Netflix holding 66% of the market, versus HBO's ~30%), there isn't THAT much more room for Netflix to grow domestically, which is often seen as its most lucrative market.