Netflix (NFLX) Considered a Good Investment by Brokers: Is This True?

Investors often rely on the recommendations of Wall Street analysts when deciding whether to buy, sell or hold stocks. Media reports about these analysts employed by brokerage firms (or by the sell-side) changing their ratings often have an impact on the stock price. Do they really matter though?

Before we discuss the reliability of broker referrals and how to use them to your advantage, let’s see what these Wall Street heavy hitters think Netflix (NFLX).

Netflix currently has an average brokerage recommendation (ABR) of 1.90 on a scale of 1 to 5 (strong buy to strong sell), calculated based on the actual recommendations (buy, hold, sell, etc.) made by 36 brokerages companies. An ABR of 1.90 is roughly between a strong buy and a buy.

Of the 36 recommendations that stem from the current ABR, 21 are a strong buy and one is a buy. Strong Buy and Buy represent 58.3% and 2.8% of all recommendations, respectively.

NFLX Broker Recommendation Trends

Broker Rating Breakdown Chart for NFLX

Check Netflix stock price target and forecast here>>>

ABR suggests buying Netflix, but making an investment decision based on this information alone may not be a good idea. According to several studies, brokerage recommendations have little or no success in directing investors to select stocks with the greatest upside potential.

Are you wondering why? As a result of brokerage firms’ vested interest in a stock they cover, their analysts tend to rate it with a strong positive bias. According to our research, brokerage firms assign five Strong Buy recommendations for every Strong Sell recommendation.

In other words, their interests are not always aligned with retail investors, rarely indicating where a stock’s price might actually be headed. Therefore, the best use of this information may be to validate your own research or an indicator that has proven to be very successful in predicting stock price movements.

With an impressive externally audited track record, our proprietary stock rating tool, Zacks Rank, which ranks stocks into five groups ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), is a reliable indicator of near-term price performance of a given action. So validating Zacks Rank with ABR can go a long way in making a profitable investment decision.

The Zacks Rank should not be confused with the ABR

Despite the fact that Zacks Rank and ABR appear on a scale of 1 to 5, they are two completely different measures.

The broker’s recommendations are the only basis for calculating the ABR, which is usually shown in decimals (such as 1.28). The Zacks Rank, on the other hand, is a quantitative model designed to harness the power of earnings forecast revisions. It is displayed as whole numbers — 1 to 5.

It was and continues to be the case that analysts employed by brokerage firms are overly optimistic with their recommendations. Due to the vested interests of their employers, these analysts issue more favorable valuations than their research would warrant, misleading investors far more often than helping them.

In contrast, the Zacks Rank is determined by earnings forecast revisions. And short-term stock price movements are strongly correlated with trends in earnings forecast revisions, according to empirical studies.

In addition, the various Zacks Ranks are applied pro rata to all stocks for which brokerage analysts provide earnings estimates for the current year. In other words, at all times this instrument maintains a balance between the five ranks it assigns.

There is also a key difference between ABR and Zacks Rank when it comes to freshness. When you look at the ABR, it may not be up to date. Nevertheless, since brokerage analysts constantly revise their earnings forecasts to reflect changing business trends, and their actions are reflected in the Zacks Rank quickly enough, it is always timely to predict future stock prices.

Is it worth investing in NFLX?

Looking at revisions to Netflix’s earnings forecast, the Zacks Consensus Estimate for the current year was unchanged over the past month at $12.07.

Analysts’ strong views on the company’s earnings outlook, as indicated by an unchanged consensus estimate, could be a legitimate reason for the stock to perform in line with the broader market in the near term.

The size of the recent consensus estimate change, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for Netflix. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>

Therefore, it might be wise to be a little cautious with the purchase-equivalent ABR for Netflix.

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