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Wedbush Analyst Bullish on Netflix

15 Oct, 2007 By: Erik Gruenwedel

Movie Gallery Inc.'s expectant bankruptcy filing and Blockbuster Inc.'s projected subscriber decline resulted in Wedbush Morgan Securities analyst Michael Pachter Oct. 15 upgrading Netflix Inc.'s stock status to “buy” from “hold.”

The Los Angeles-based analysts believes Netflix's stock can reach a $30 per share target price compared to previous guidance of $18 per share in fiscal 2008.

Netflix shares were up 96 cents Oct. 15 to $23.96 in afternoon trading.

Pachter said he expects from 4 to 5 million traditional movie renters to find their local Gallery or Hollywood Video location shuttered in the next 12 months.

He believes new Blockbuster CEO Jim Keyes is not interested in a protracted and expensive turf war with Netflix. In addition, Blockbuster is expected to raise the monthly price for its most popular Total Access, online rental, in-store return program to $19.99 from $17.99.

In turn, Pachter expects Netflix to cut its marketing costs and lower subscriber acquisition costs, a metric key to online investors, according to the analyst. He also expects Netflix to raise its most popular plan from $16.99 to $17.99.

“We believe that as many as 10% of these customers will choose a Netflix trial,” Pachter said in a research note.

He said Netflix would add upwards of 750,000 subscribers during fiscal 2008. The report said the online rental pioneer's third quarter revenues should top $292 million, compared to previous guidance of $286 million.

Pachter said he remains unconvinced about the long-term business model for Netflix, which suffered when subjected to Total Access and resulted in Netflix lowering its monthly sub prices by $1.

“[Netflix] has consistently executed well but when faced with a superior product offering from Blockbuster, it was unable to compete effectively,” he said.

The Wedbush report concluded that Blockbuster would benefit from Gallery closures in comparable same-store rental revenue and profitability — not subscriber growth.

Pachter said that as long as Gallery implodes, Blockbuster and Netflix would engage in a “cease fire” over subscriber growth.

“We envision a scenario where Netflix grows its subscribers base while Blockbuster loses subscribers and where both companies profit immensely,” Pachter wrote.

As a matter of policy, Netflix does not comment on analyst projections. A Blockbuster spokesperson was not immediately available for comment.

Netflix reports third quarter results Oct. 22; Blockbuster reports its financials Nov. 1.

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