Netflix (NASDAQ: NFLX), the Los Gatos, California, video rental and streaming company, saw its shares soar in today’s trading. Following an announcement by Morgan Stanley, specifically analyst Scott Devitt, Netflix rose 10.5% on the day. This gain of nearly $7.00 saw the stock close at its highest mark since July at $73.52.
The announcement essentially saw Netflix promoted from the equivalent of a “hold” rating to a “buy” rating this morning (Morgan Stanley uses the terms “equalweight” and “overweight” respectively for these two ratings). Though the stock enjoyed nothing short of a stellar day, Netflix still remains well below the value it held in February. While investors may use this February price as a benchmark, Netflix stock remains up over 6% on the year following today’s gains.
Mr. Devitt, in his report, stated that Netflix’s domestic market was sufficiently strong to justify his upgrading of the stock and backtracked on his earlier suggestions that Amazon’s (NASDAQ: AMZN) Prime Instant Video service represented a direct threat to Netflix in the short term.
“Previously, we were very concerned about Amazon.com’s Prime Instant Video offering,” Devitt said. “Prime Instant Video is all about value investing –- finding good content at low prices and offering more incentive for consumers to buy a Kindle Fire.”
Devitt went so far as to call the pressure from Amazon.com “overblown”, while stating that Amazon would have to spend no less than $1.2 billion in order to directly compete with Netflix.
There is little question that Netflix needs to keep an eye on both Amazon.com and Hulu, but with over 27 million streaming customers worldwide, Netflix maintains a comfortable revenue stream despite some criticism that its monthly fee for subscribers is far too low. That being said, although Netflix does not disclose its aggregate content available numbers, the 25,000 videos made available by Amazon.com for free streaming is dwarfed by the library of the Los Gatos company.
“We have everything Amazon has – and lots more,” said Netflix spokesman Jonathon Friedland in an email to Bloomberg Business.
Devitt also set the target price for Netflix at $85.00 while stating in his research notes, “We believe the primary driver of content revaluation was Netflix’s own success. Netflix is poised to leverage its domestic cost structure and potentially become the global video platform.”
Following today’s upgrade, as well as other recent developments, many investors believe that it would be wiser for Amazon to acquire Netflix rather than try to go head to head with the company, having already spotted Netflix a potentially insurmountable lead.
This possible acquisition may or may not be the first time that Amazon has looked to snatch up Netflix. In the book Netflixed: The Epic Battle for America’s Eyeballs, due for release on October 11, author Gina Keating suggests that Netflix founders Marc Randolph and Reed Hastings met with Jeff Bezos three years before they went public and wisely turned down an offer of $12 million. As of today, neither company has addressed the validity of this story.
Whether a target price of $85.00 is reasonable remains to be seen. However, if Amazon shows future interest in the company, $85.00 seems to be well within reach, and Amazon will likely need to come up with quite a bit more than $12 million.