How Will This Downgrade Affect Netflix?

Netflix delivers to its subscribers and shareholders.From the outset, Hewlett-Packard (NYSE:HPQ) appears to have very little in common with Netflix (NASDAQ:NFLX); one company is the world’s leading PC manufacturer and the other provides an online streaming video service. But there is one point of commonality: accounting. The investment firm Albert Fried has said that potential Netflix buyers could find the HP-Autonomy accounting debacle worrisome as the company’s method of accounting is “aggressive.”

What Problems Does Netflix Have With its Accounting?

On Monday, Albert Fried downgraded Netflix to an Underperform rating, saying “We think NFLX’s aggressive accounting practices in the context of the Autonomy fiasco are enough to dissuade potential NFLX suitors.” The firm added, “We think corporate boards will be more diligent in large strategic transactions and we think due diligence is a potential NFLX deal head wind.”

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HP’s most recent quarterly report showed that its acquisition of Autonomy forced the company to take a $5 billion charge related to accounting missteps. With Alfred Fried linking Netflix to this case, potential investors are reminded of Netflix’s own accounting problems…

CHEAT SHEET Analysis: Does “Honest Accounting Govern Netflix’s Books”

This is not the first dubious mention of Netflix’s accounting methods. In July of this year, the governance research firm GMI Rating ranked the company third on its list of companies most likely to have an accounting scandal, giving it an Accounting and Governance Risk of 2. According to the firm, the score was based on the “class action lawsuit filed at the beginning of the year [that] alleged that Netflix and certain of its officers and directors issued false and misleading statements regarding the company’s business practices and its contracts with content providers, causing the company’s stock to trade at artificially inflated prices.” Netflix was deemed to have “more accounting and governance risk than 98% of companies” on the list.

The suit, which followed Netflix’s aborted plan to unbundle its DVD rental and streaming plan, claimed that company insiders “concealed negative trends.” Specifically, the plaintiffs alleged that the company did not disclose the “the devastating cost increases which were then threatening Netflix’s entire business,” including increasing competition and rising licensing fees.

How will Albert Fried’s Rating Affect Netflix’s Stock?

With Microsoft’s (NASDAQ:MSFT) rumored interest and Carl Icahn’s overt interest in acquiring the company making news, many analysts have speculated whether a takeover is Netflix’s future. Furthermore, the streaming video provider is at a crossroads, as the ever-increasing licensing fees threaten the company’s business, making the chance of a takeover more likely. However, with Albert Fried’s negative rating indicating that Netflix is not a good candidate for an acquisition, its shares may be affected. On the news of the downgrade, share fell 1 percent and fell below its 200 day moving average of $80.17.

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