Netflix Valuation Unwarranted; 'Irrationally Bid Up,' Says Analyst

Netflix Inc.

shares pulled back in pre-market trading as an analyst on Tuesday called the company "disingenuous" in calculating a key profit margin. Wedbush's Michael Pachter said Netflix's high valuation is "unwarranted" in light of what he called the potential for slowing domestic growth, increasing competition and higher costs for its content. Investors have "irrationally bid up Netflix beyond fair value," Pachter said, noting a persistent gap between the company's net income and free cash flow. Such gaps in general may suggest thata company's spending projects aren't getting a good return, or that they aren't properly depreciated. Pachter said Netflix's gap must ultimately be amortized through its income statement. "We expect earnings pressure to begin as soon as next year," Pachter said. The analyst added that Netflix's management is being "disingenuous by ignoring tech spending in calculating its so-called contribution margin, which is variable expense subtracted from sales. Moverover, Netflix is rapidly losing subscribers to its DVD service which accounts for half its revenue, while Amazon.com Inc.

appears poised to launch a competing streaming service. Pachter, who maintained an "Underperform rating, nonetheless raised his price target to $245 from $215, to reflect better-than-expected subscriber growth in the recent quarter, and improving profits for its domestic streaming segment. Netflix on Monday met second-quarter earnings expectations but said international expansion costs will lower third-quarter profits. In pre-market trading, Netflix changed hands recently down nearly 2 percent at $443.61.