Netflix upgraded to 'buy' by Wedbush Morgan
PHYSICAL: Analyst cites streaming investment, price plunge
By Danny King -- Video Business, 6/17/2009
JUNE 17 | PHYSICAL: Netflix shares are likely to reverse their recent price decline as the largest U.S. movie-rental service via mail invests more in its higher-margin video-streaming service and attracts more Microsoft Xbox Live subscribers for its digitally-delivered titles, said Wedbush Morgan analyst Michael Pachter, who upgraded the stock today to a “buy” rating from “hold.” Netflix stock has lost about a quarter of its value since late April.
Netflix will continue to attract more customers to its video-streaming business as it expands its digital delivery beyond its current 12,000 titles and as more people buy electronic components that can transmit digital titles to televisions from the Internet, Pachter wrote in a note to clients today. Pachter maintained his $48 price target on the stock.
“As streaming gains in popularity and Netflix realizes higher margins, we expect the company to reinvest a portion in more streaming content,” Pachter wrote. “Ultimately, the migration from disc rental to streaming will allow Netflix to expand its margins, as it will shift its cost of goods from physical DVDs to digital streams and will eliminate a portion of its postage costs.”
Netflix shares jumped more than 50% between the beginning of the year and mid-April, after which Lazard Capital Markets analyst Barton Crockett initiated coverage with a “sell” rating and noted that the company’s “Watch Instantly” video-streaming service may be slowed by such competing services as Google’s YouTube and the News Corp.- and NBC Universal-owned Hulu. The following week, Merrill Lynch’s Nat Schindler said shares would likely tumble once the stock market took into account that Netflix doesn’t charge extra for the streaming service.
Netflix’s shares, which neared $50 in late April, closed at $37.83 yesterday before rising 6.8% to $40.40 today after the Wedbush upgrade.
In addition to the increased investment in digital titles, Pachter cited an expected increase in video-streaming from subscribers of Microsoft’s Xbox Live videogame platform as a source of earnings and stock value. Last November, Netflix agreed to have its video-streamed titles playable on TVs through Xbox consoles. Within the first three months of the agreement, 1 million Xbox owners had downloaded the application required to play Netflix titles, Netflix said in February.
