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Analysts Shine on Netflix

19 May, 2009 By: Erik Gruenwedel


Netflix Inc. May 19 received a boost when Barton Crockett, analyst with Lazard Capital Markets in New York, upgraded his rating for the online DVD rental pioneer’s stock from “sell” to “hold”.

Citing April data from comScore that showed a 20% year-over-year increase in unique visitors (13.8 million) to Netflix.com coupled with favorable comments from Netflix CFO Barry McCarthy in a presentation, Crockett said he felt the service could continue to deliver subscriber growth near the high end of guidance.

The analyst said that even when factoring in a 10% to 12% decline in unique visitors in May and June due to competitive factors, including box office surge and the beginning of summer, average unique visitors in 2009 would tally 12.93 million, up 14.6% from the previous year.
Crockett said the average unique visitors translate into 1.89 million new subscribers, which correspond to a base of 10.59 million subscribers when factoring in 4.4% annual churn rate. Churn includes free and paying subscribers who decide not to renew monthly subscription service.

“We believe a sub tally at this level would be enough … as long as Netflix maintains subscriber guidance for the year, which we believe is likely now,” Crockett said in a research note.

The analyst remained nonplussed at McCarthy’s comments that Redbox rental kiosks represented little or no threat to Netflix. He said the CFO’s comment was inconsistent with previous statements during financial calls where CEO Reed Hastings said kiosks could become the largest driver of churn.

Edward Woo, research analyst with Wedbush Morgan Securities in Los Angeles, said kiosks remain a near-to-medium term threat compared to video-on-demand (VOD) and streaming. He believes kiosks will slow Netflix growth and eventually steal customers.

“Reed wouldn't have mentioned [kiosks] for the first time in the last conference call if it wasn’t a legitimate threat,” Woo said.

Lazard’s Crockett also differed with McCarthy on the impact VOD and streaming would have on the by-mail DVD rental business. He said Netflix’s online advantage could be usurped by competitors (including studios) offering branded sites with ad-supported, pay-per-view, subscription and electronic sellthrough options.

“We don’t see Netflix having a lasting brand advantage versus rivals like Google, Apple, Hulu and Amazon, and see studios more closely aligned over time with services they own, such as Hulu,” Crockett said.

Woo added that Netflix subscribers’ preference for catalog fare over new releases is not failsafe either.

“While its true most of its business is catalog (75%), it still hurts to lose 25% of its business,” he said.

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