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Analyst Sees Reinvigorated Netflix

10 Jan, 2012 By: Erik Gruenwedel

With Netflix’s stock valuation up more than 40% in the early days of 2012, the sun could be rising on what many observers have said would be a muddled year for the streaming rental pioneer, an analyst said.

Eric Wold, with B. Riley & Co. in Los Angeles, said Netflix’s recent revelation that subscribers streamed more than 2 billion hours of content in the fourth quarter — twice previous projections — combined with a leveling off of sub declines and rollout of long-awaited service in the United Kingdom indicate an emerging calm for the rental company.

“Should those stabilizing domestic subscriber trends continue to hold, we believe investors will be more comfortable that Netflix is holding its own against the growing competitive options for consumers,” Wold wrote in a Jan. 10 note.

The analyst said Netflix’s upcoming earnings report should shed light on new subscriber response to rollout of service in Latin America, the Caribbean and Mexico last September. While Netflix Canada already has posted operating income ahead of schedule, Wold believes the results don’t realistically assess the service’s international appeal, given Canada’s close geographical proximity to the United States. Strong consumer interest in the new regions, however, also would require increased marketing spending, which affects the bottom line.

“While greater-than-expected subscriber demand internationally could mean higher losses initially than most have modeled, we believe that it would help to lessen investor concerns that Netflix is a U.S.-only story,” Wold wrote.

The analyst maintains a “buy” rating on Netflix’s stock and 2012 loss per share projection of 24 cents, which is well below the consensus earnings per share of 2 cents. Netflix officially has projected losses through the entire year.

“While neither of the two positive drivers above are likely to generate upside to 2012 estimates, we believe they would not only set the stage for stronger-than-expected revenue and [earnings per share] growth in 2013, but they would also help to reinvigorate investor interest in the Netflix story — and more realistic long-term valuation multiples going forward,” Wold wrote.

Netflix reports Q4 earnings at the close of the market Jan. 25.

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