Netflix's videostreaming will attract investors, suitors
DIGITAL: Amazon leads group of possible acquirers, analyst says
By Danny King -- Video Business, 12/28/2009
DEC. 28 | DIGITAL: In short, investors should buy Netflix now before someone else buys it later.
That’s the crux of a note Susquehanna Financial Group analyst Marianne Wolk wrote when she initiated coverage with a “positive,” or buy rating for Netflix last week.
With a digital delivery service “superior to most alternatives today,” its high customer-retention rate and an estimated five years needed for most customers to migrate to digital from DVDs, the largest U.S. movie-rental service via mail has ample opportunity to continue expanding its subscriber base, which widened by 28% from a year earlier to 11.1 million in the third quarter, according to the analyst.
Because of such growth, Netflix has a 50% chance of being acquired within the next five years, with Amazon.com as the most likely suitor, Wolk said in a note to clients last week. Wolk also put a $70 price target on Netflix, or 31% higher than the company’s closing share price on Dec. 22, the day before her note was released. Since then, shares have risen 7%.
Netflix has been boosting its investment in its videostreaming service while widening both its inventory of digital titles and the number of electronic components that can play them on televisions. The company, whose agreements for component playability of its digital titles include Samsung and LG Electronics Blu-ray Disc players and high-definition televisions, reached an agreement in October to make its titles playable through Sony’s PlayStation 3 videogame consoles. More than 17,000 of its 100,000 titles are available in videostreaming form.
“Netflix has a video offering that users love,” wrote Wolk. “We see a multi-year window of opportunity for Netflix to build a larger, more significant presence in the digital video market.”
Among potential buyers, Amazon is the most likely because Netflix’s video-recommendation engine and feedback database would work well with Amazon’s strengths, while its subscriber base would help accelerate digital-based media sales for the world’s largest Internet retailer, Wolk wrote.
Other possible buyers include Google, which has plenty of cash to buy Netflix as well as a complementary user-generated content service in YouTube, and Comcast, which is looking to widen its off-television content distribution, according to Wolk.
Earlier this month, analysts with both Citigroup and Merriman Curhan Ford downgraded Netflix to a “hold” rating from “buy” after the company’s share price doubled during the first 11 months of the year.
