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Analyst Upgrades Netflix, Expects Gallery Bankruptcy

4 Sep, 2007 By: Erik Gruenwedel

Online DVD rental pioneer Netflix Inc., under siege by Blockbuster Inc.'s Total Access online rental, in-store return service, Sept. 4 received a boost after a Wall Street analyst upgraded the company's shares to “hold” from “sell.”

The news helped Netflix shares close up almost 5% (83 cents) in after hours trading to $18.14 per share.

Michael Pachter, media analyst with Wedbush Morgan Securities in Los Angeles, said ongoing fiscal challenges affecting No. 3 video chain Movie Gallery helped raise the online rental competitive tide.

“We expect a Movie Gallery bankruptcy before year-end coupled with decreased marketing from Blockbuster,” Pachter said in a research note. “We continue to believe that [Netflix] will again approach market saturation once the impact of the Movie Gallery bankruptcy is absorbed.”

He said a Gallery bankruptcy would likely result in the closure of 1,000 video stores (mostly Hollywood Video), which Pachter said generate about $600 million in annual revenues based on a customer base from 4 million to 5 million members.

Pachter said Netflix could capture as much as 10% of these customers over the next four quarters, which he said would represent 700,000 net subscribers through 2009, up from 500,000 previously forecast.

“We have a greater degree of confidence in Netflix's ability to grow in the event that Gallery begins to aggressively close stores,” Pachter said. “We believe that brick-and-mortar customers will be forced to find a new way to rent, and that a significant portion of these customers will find the Netflix product offering appealing.”

But Pachter said Total Access' traditional and online convenience continues to make it a superior product to Netflix, and that would limit Netflix's ability to grow in 2009 and beyond.

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