The Roller Coaster Ride Continues for Netflix Shares

Shareholders of Netflix (NASDAQ:NFLX) have been on a wild roller coaster ride in recent years. After hitting all-time highs above $300 in July 2011, shares collapsed to finish the year at $70. Netflix rebounded in early 2012, but suffered another drop-off. Now, a recent round of positive exposure has Netflix on the upswing again.

On Monday, Morgan Stanley (NYSE:MS) analyst Scott Devitt raised his rating on Netflix to Overweight from Equal-Weight with a price target of $85, citing that the Wall Street is giving to much credit to Amazon.com’s (NASDAQ:AMZN) streaming services.

“We believe the primary driver of content revaluation was Netflix’s own success,” he explains in a research note. He adds, “Amazon.com’s strategy around Prime Instant Video is an adapted ‘freemium’ model. Prime customers receive free content and then supplement their viewing experience by renting movies from Amazon. This offering only works if Amazon.com keeps Prime Instant Video tethered to Prime. Once they offer a standalone product, they will face the Netflix content gap, which will cost an incremental ~$1.0-1.2B to close. We believe Amazon.com would rather invest that in other initiatives.” Devitt also believes that Netflix’s domestic business alone is enough to justify the company’s current stock price.

Last week, hedge fund manager Whitney Tilson said Netflix offers a rare opportunity in the technology sector. Speaking at the Value Investing Congress in New York City, he believes the gains for Netflix are just beginning. He even compared the company to what e-commerce giant Amazon was 10 years ago. Both companies use technology and the Internet to deliver an old product in a new way, both have visionary and entrepreneurial CEOs, and both are willing to sacrifice short-term profits for long-term growth. “Two companies, 10 years apart, very similar,” explains Tilson, “and my point is, that’s the kind of upside that Netflix has if it executes well.”

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Despite rising content costs and the difficulties with international markets, Tilson provided three reasons for his bullish outlook on Netflix: First, its small market capitalization makes Netflix open for easy acquisition; second, the company has a large global growth opportunity; and third, according to company CEO Reed Hastings, its domestic subscriber growth has increased. As long as Netflix remains the dominant online entertainment company, Tilson predicts the company will grow at 30 to 40 percent.

Even though Tilson has been wrong on Netflix in the past, his optimism was enough to send shares 3 percent higher after speaking. Shortly thereafter, Netflix received another boost from Citigroup (NYSE:C). The financial firm called the company a “Screaming” Buy. Citi conducted a survey of nearly 4,000 Internet users that found overall customer satisfaction with Netflix improved for the first time since Netflix looked to separate its DVD and streaming business last year. Almost half of those polled were either Very or Extremely Satisfied. Around 37 percent said streaming content improved, compared to 16 percent who claimed it has worsened. Netflix is also looking to add appeal by updating a new “Just for Kids” feature on its Apple (NASDAQ:AAPL) iPad app. The feature is now available and provides access to child-friendly content from one easy to access section.

The upgrade from Morgan Stanley paved the way for Netflix shares to jump 10 percent on Monday. Over the past week, shares have surged about 30 percent, erasing all of its losses for 2012.

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