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Wedbush Upgrades Netflix

17 Jun, 2009 By: Erik Gruenwedel


Wall Street darling Netflix June 17 received more kudos when Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, upgraded the service’s stock to “buy” from “hold.”

Regarding the Los Gatos, Calif.-based online DVD rental pioneer’s successful (and free to subscribers) streaming service, Watch Instantly, Pachter said Netflix could afford to treat it as a loss leader while continuing to invest significantly in digital content — about $100 million this year. 

“The company continues to attract customers from brick-and-mortar chains, and continues to retain customers by offering its unique streaming proposition,” Pachter said in a note. “As more customers migrate to streaming, we expect to see margins expand further.”

Pachter lauded Netflix’s savvy surcharge for Blu-ray rentals (about $2 per BD subscriber) that he believes would contribute about 20 cents in average revenue per user (ARPU) in the current (second) quarter, offsetting Netflix management’s projected seasonal ARPU decline of 15 cents.

Pachter said about 10% of Netflix’s 10.3 million subscribers adopted the Blu-ray price surcharge.

The analyst reaffirmed previous statements by Netflix CEO Reed Hastings and CFO Barry McCarthy that underscored a willingness to balance earnings growth with investment in digital content.

“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,” Pachter said.

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