SAN FRANCISCO (AP) — Netflix's stock surged 11 percent Monday afternoon after an analyst sought to ease investor fears that the online subscription service will face intensifying completion from Amazon.com.
THE SPARK: Morgan Stanley analyst Scott Devitt sees more to like about Netflix than he did a few months ago, upgrading the company's stock to "overweight" from "equal-weight."
The shift in sentiment reflects Devitt's belief that Amazon.com Inc. has no intention of spending enough money to build an online video service as comprehensive or as appealing as the one that Netflix sells for $8 per month.
THE BIG PICTURE: Netflix's stock has been prone to wild swings since the company went public a decade ago as investors debated whether its video subscription service would prove to be a shooting star or an enduring force in the home entertainment industry.
The volatility has become more extreme since July 2011 when Netflix unveiled a new rental system that raised its prices by as much as 60 percent for U.S. subscribers who wanted stream Internet video and rent DVDs through the mail
Meanwhile, Amazon has been steadily expanding an Internet video service that it provides to its customers who pay a $79 annual fee to get unlimited free shipping on merchandise bought in its Web store.
After landing the rights to content on Epix's pay-TV channel last month, Amazon's 20-month-old online streaming service includes more than 25,000 movies and episodes from old TV shows. Netflix Inc., in contrast, offers more than 60,000 titles. Like Amazon, Netflix counts each episode of a TV series as a separate title.
THE ANALYSIS: If it wanted to be more competitive with Netflix, Amazon would have to pay movie and TV studios an additional $1 billion to $1.2 billion for more video rights, Devitt wrote in a Monday research note. He reasons Amazon would prefer to spend that money elsewhere. He believes Amazon primarily offers its video-streaming library as a way to get people hooked on watching movies and TVs on the company's Kindle Fire tablet computers. Amazon can then try to make money trying to entice the Kindle Fire users to buy or rent more recently released movies that aren't available in the Internet video library available to its free-shipping customers, Devitt said.
Facing less intense competition from Amazon could help Netflix attract and retain more subscribers and, more importantly, hold down its costs for licensing video. Devitt already thinks Netflix management has been showing more discipline in its recent negotiations for online video rights after splurging during a stretch of robust subscriber growth in 2010 and 2011. The more prudent approach has been driven a slowdown in U.S. subscriber growth that is forcing Netflix to be more careful with its money.
SHARE ACTION: Netflix's stock gained $7.39 to $73.95 in afternoon trading. The shares have ranged from $52.81 to $133.43 during the past year.
The stock remains about 75 percent below its peak of nearly $305 in summer 2011, despite a recent rally. The stock also posted a one-day gain of nearly 11 percent last Wednesday after a Citi analyst released a survey showing Netflix's customer satisfaction levels are rising, a trend likely to reduce the frequency of subscriber cancellations in the months ahead.
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