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Summary:

In 2010, people couldn’t say enough good things about Netflix (NSDQ: NFLX) — it was the darling of the digital entertainment world. Then la…

Netflix

In 2010, people couldn’t say enough good things about Netflix (NSDQ: NFLX) — it was the darling of the digital entertainment world. Then last year, they couldn’t say enough bad things, after a series of public-relations fiascos cratered its stock price and subscriber count. So where does the company stand now? According to a new analyst report, it has not only recovered its lost luster in the eyes of consumers — its streaming business model remains pretty nifty, too.

Conceding that Netflix is one of the most “controversial” stocks they cover, Citigroup analysts pegged a price target for the company’s stock at $130 per share, well above the $106.35 it closed at Tuesday. As principal justification for its bullishness, the investment bank said simply that Netflix’s streaming costs are essentially fixed while the profit-margin growth remains buoyantly flexible.

Based on Netflix’s public statements, Citigroup believes the company’s content acquisition costs will be about $1.8 billion this year, while promotional spending will stay at around $300 million. And for each 1 million subscribers Netflix is able to add to its current U.S. base of nearly 25 million, Citigroup thinks it will add $90 million in incremental profit to its bottom line. And, importantly, the analysts believe the company won’t have to add much to the estimated fixed costs of $2.1 billion to acquire those extra subscribers. For the last fiscal year, Netflix reported a net income of $231 million.

Citigroup says the the results of a consumer survey that it did give it further cause to be bullish on Netflix. The survey, which polled U.S. consumers about Netflix earlier this month and compared the results to similar research done in May and December of last year, showed no erosion in Netflix’s competitive position, despite ill-received price hikes last summer and a conspicuously failed spin-off attempt of the streaming business in the fall.

In fact, when the 3,500 consumers were asked earlier this month which online destination they’ve used to watch movies and TV shows, 30 percent said Netflix — up from 27 percent in December and 25 percent last May. Reported usage of competitor Hulu, meanwhile, dropped from 23 percent in May to a current level of 14 percent, while usage of Apples iTunes store fell from 10 percent to 7 percent over the same 10-month period.

Further, Citigroup found that subscriber satisfaction hasn’t ebbed too badly for Netflix, despite its 2011 challenges. While the number of customers reporting “extreme satisfaction” with Netflix has declined from a whopping 50 percent in May of last year to a current level of only 10 percent, overall, 81 percent of customers still report some level of basic happiness with the service.

Meanwhile, the percentage of subscribers who are thinking of cutting their monthly Netflix bill is dwindling — 53 percent said they were “not at all likely” to cancel Netflix this month, compared to 46 percent in December and 43 percent last May. Other interesting tidbits from the Citigroup survey:

– Despite claims by Netflix officials that the company is evolving into a “catch-up” service for archival TV content, the majority of subscribers still stream mostly movies. According to the most recent Citigroup survey, 51 percent of subscribers mostly stream films on Netflix, while only 17 percent say they most often watch TV shows.

– 71 percent of those surveyed have no interest in a Facebook integration feature that will allows their social-networking friends to see what they’re watching.

– Usage of the platform by consumers seems to be stable. Asked if they were using their Netflix account more or less since they started subscribing, 82 respondents reported usage that was either the same or moderately less or more; 9 percent said they used it “much more,” and another 9 percent reported “much less” Netflix usage.

  1. The subs did not crater after a 60% price increase and the stock price only went down to the low $60s. It has always been about the “iffy” business model.  Think about it, even after a 60% price increase they will still lose money in 2012.  When the stock price drops below $15 a share, look for someone to acquire them. 

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  2. Citi’s analysts need some charting skill help.  That Figure 2 is nonintuitive.  Which comes first, March, or May?  How about changing the legend and adding years?

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  3. —71 percent of those surveyed have no interest in a Facebook integration
    feature that will allows their social-networking friends to see what
    they’re watching.

    Put me in that group, I wouldn’t want my friends and family to all know what movies I’m watching in the privacy of my home.

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  4. I don’t consider it a recovery until they attract the old customers that they alienated back. I haven’t gone back, so I know that has failed. If they fire the arrogant CEO we would consider returning.

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