This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines include new buy ratings for International Business Machines Corp. (NYSE:IBM) and Toyota Motor Corporation (ADR) (NYSE:TM). But it’s not all good news, so let’s start off with a look at why one analyst is …
Pulling the plug on Netflix, Inc. (NASDAQ:NFLX)
Stock markets are up this morning, but over at Netflix, Inc. (NASDAQ:NFLX), all investors are seeing is a static. Thanks in part to an initiation at “underweight” by Evercore Partners today, Netflix, Inc. (NASDAQ:NFLX) shares are sitting out the rally, and actually are down a fraction of a percent in late morning trading.
Why? In a word: competition. Evercore worries that even if it was the top dog and first mover in streaming video, the market is big enough to support more than one major player. If Netflix, Inc. (NASDAQ:NFLX) has to contend with one or more rivals, it will have to bid higher prices to license content from creators. This will raise the company’s cost of business. Meanwhile, price competition on the delivery end will prevent the company from passing higher content costs on to consumers. Thus, Netflix, Inc. (NASDAQ:NFLX) will see its profit margins squeezed on both ends.
All of this adds up to limited potential from profit growth at a company whose shares already cost 575 times earnings. With a 20% expected growth rate, that share price was always in danger. Now, Evercore is warning investors that the danger is even greater than we thought. The analyst thinks it’s best to lighten up your exposure to Netflix, Inc. (NASDAQ:NFLX) now, and I agree.
Go big with Big Blue?
Looking for a better bargain? UBS thinks it’s found one in the shares of International Business Machines Corp. (NYSE:IBM), which the Swiss banker just upgraded to buy Wednesday morning.
The analyst here thinks IBM shares could be worth $235 within a year, and while I don’t think UBS is right about that, it’s at least in the ballpark. Here’s why:
IBM shares currently cost about 14.7 times earnings. That’s not a whole lot to pay for a stock growing earnings at close to 11%, and paying a 1.6% dividend. On the other hand, though, IBM isn’t generating quite as much cash as its income statement suggests. It generated only about $15.5 billion in true free cash flow last year, versus reported “net income” of $16.6 billion. Large numbers either way, but the one isn’t as big as the other, and to me, this suggests that IBM’s about 7% more expensive than it looks — or even more, once you factor the company’s $22 billion debt load into the picture.