Analyst thinks worst is over for Netflix's stock

August 21, 2012

SAN FRANCISCO (AP) — Netflix's battered stock could soon be on the mend, according to Caris & Co. analyst David Miller.

In a an upgrade issued Tuesday, Miller predicted Netflix will get some financial relief from a key deal that the Internet video subscription serviced signed with the pay-TV channel Epix two years ago. The analyst also suspects recent revisions to Netflix's projected performance for next year are underestimating how much money the company is going to make.

Netflix Inc. shares added 80 cents to $65.04 in Tuesday's afternoon trading. The stock hit its all-time high of nearly $305 in July 2011, right around the same time the company infuriated its U.S. subscribers by raising its prices by as much as 60 percent for Internet video streaming and DVD-by-mail rentals.

The five-year contract with Epix initially gave Netflix the exclusive online rights to the movies released by Paramount, Lionsgate and MGM, the three studios that run the pay-TV channel as a joint venture. A provision in agreement opens a window for the pay-TV channel to license the Internet video rights to competing services during the final three years of the deal.

Miller believes Netflix won't have to pay as much for the rights during the final three years of the Epix deal if it allows the channel to sell the content elsewhere.

In its commentary about its second-quarter results released last month, Netflix emphasized it would have non-exclusive rights to Epix content through the middle of August 2013. The company didn't mention any anticipated change to the Epix licensing fees.

"Epix has become a great product and we look forward to our ongoing relationship," Netflix said in its second-quarter report. A company spokesman had no further comment Tuesday.

Netflix's expenses have been steadily rising as movie and TV studios demand higher fee for Internet streaming rights and the company pays the bills to expand its service into countries outside the U.S. The service is already in the United Kingdom, Ireland, Canada and Latin America, and plans to expand into four Nordic countries later this year.

Those higher costs could saddle Netflix with a loss this year. After Netflix's second-quarter results disappointed, Wall Street's outlook for the company next year darkened. The average 2013 earnings estimate among analysts surveyed by FactSet, now stands at 93 cents per share, down from an average of $2.09 per share before the July 24 release of Netflix's second-quarter earnings.

"We believe that consensus figure is simply too draconian, and is the result of estimate revisions based on emotion rather than analysis," Miller wrote in his research note.

Miller now expects Netflix's stock to deliver "average" returns, up from a "below average" rating that he had in place for the past 11 months. Netflix's shares have plunged by 62 percent since Miller downgraded the stock.