Shares of Netflix (Nasdaq: NFLX ) jumped more than 11% on Monday, buoyed by an upgrade from financial heavyweight Morgan Stanley. But that upgrade is merely the latest in a series of positive news for the embattled digital video expert. Altogether, shares have soared an astounding 35% over the last week.
Where's the beef?
Morgan Stanley analyst Scott Devitt leaned on some prime rib to support his upgrade from "hold" to "buy." Many critics worry that Amazon.com (Nasdaq: AMZN ) might destroy Netflix with its Amazon Prime video library and huge cash reserves. All it would take, the theory goes, is for Amazon to sell that service as a standalone product that has nothing to do with the Prime shipping discount program.
Devitt used to think so, too. Now he's dismissing that concern:
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 $1.0-1.2 billion to close. We believe Amazon.com would rather invest that in other initiatives.
That's exactly right, in this Fool's opinion. Amazon is treating its video service as a promotion. It's designed to drive users through Amazon's virtual shopping doors. Come for the cheap movies, stay for the free shipping!
And Amazon's model is fundamentally different from the Netflix service. If Netflix sells an all-you-can-eat buffet at a single price, then Amazon offers a low-cost side dish of movies and TV shows. Jeff Bezos really wants you to gorge on the pay-per-view content that isn't included in the Prime plan, and then go buy a huge bag of popcorn to go along with it--inspired by the free Prime shipping, of course!
Not bad company to keep
Hedge fund manager and occasional Fool writer Whitney Tilson saw this a couple of weeks ago, and took the argument a bit further. Speaking at an investing conference, Tilson presented Netflix as one of his three favorite stocks right now, the other two being Warren Buffett's Berkshire Hathaway and real estate vehicle Howard Hughes.
While Hughes and Berkshire are "extremely safe" and undervalued in Tilson's opinion, it's Netflix that really gets his investing juices flowing.
Everybody's talking about heavy competition in the digital media market, but "very little is currently detectable." Like Amazon, Netflix is run by a "visionary, entrepreneurial" CEO and uses this newfangled Internet thing to deliver traditional products in a new way.
Both also have massive global growth opportunities ahead of them, but Tilson said that Netflix is a better business than Amazon.
Strong words indeed from a former short-seller.
A different kind of "screaming buy"
Between these bookends, Citigroup's Mark Mahaney pounded the table some more. Citi reiterated a "buy" rating and $120 price target last week, based on positive trends in the consumer satisfaction surveys the bank conducts. Consumers are heaping more love on the Netflix service than last quarter, something that hasn't happened since last summer's Qwikster debacle took the wind out of the company's sails.
Mahaney does worry about Amazon and other lurking competitors, but not enough to override "what we view as a highly reasonable valuation, a generally positive execution track record, and the still early market opportunity for Internet video streaming."
The firm is keenly aware of how controversial a thumbs-up pick on Netflix can be right now. "Netflix remains one of the most controversial stocks we cover," Mahaney said. "It's our 'Screaming' Buy -- we say 'Buy,' people scream."
Is this guy angling for a writing job with the Fool, too? He'd fit right in.
So Netflix has received a triple helping of Wall Street boosts lately, running the gamut from bargain-basement valuations to dramatic growth ahead. I'll just add that Mahaney's $120 price target seems just about right for January or so. Beyond that, I believe the stock is ready to double or triple again by 2015. That's why I have a thumbs-up CAPScall and a real-money position riding on Netflix.
This stock always tasted like steak. What's different now is that the market is giving it some sizzle again. The cooking fires never stopped burning.
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