(By Balachander) Netflix Inc. (NASDAQ:NFLX) jumped as much as 10.6 percent after an analyst upgraded shares of the online movie streaming company, saying the Amazon's (NASDAQ:AMZN) video service is not a direct threat to Netflix's U.S. business.
Morgan Stanley analyst Scott Devitt upgraded his rating on Netflix to "overweight" from "equalweight,".
"Devitt says Amazon isn't focused on developing original content to the degree he thought the ecommerce giant would be, potentially diminishing one of the competitive threats facing Netflix," Wall Street Journal reported.
According to the WSJ report, the analyst believes Amazon.com has a different domestic strategy with regards to its video offering and said the company's 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."
Shares of Netflix rose 20 percent last week, driven by a survey by Citigroup that showed an improvement in the overall customer satisfaction. The survey showed that 48 percent of Netflix's current subscribers are very or extremely satisfied compared to 44 percent to 45 percent levels observed in the first and second quarter of 2012.
Customer satisfaction is not an issue with Netflix, barring last September's price increase triggering mass defections and trade downs, and tarnishing the attractiveness of the service to new customers.
Netflix still is the leading player streaming and DVD rental businesses due to its impressive content library and superior video quality despite budding competitors such as Amazon, Dish Network (NASDAQ:DISH) Blockbuster and Comcast (NASDAQ:CMCSA).
The real problem for Netflix is the rising content costs and increasing competition. For instance, Netflix streaming content costs could increase by an estimated $200 million to $400 million annually, and the rising content costs would pressure margins. Due to higher costs, Netflix already dumped Starz, lost Epix exclusivity, and just recently lost content from A&E and the History Channel.
Devitt wrote Netflix should see lower flux in revenue, and an increase in margins, as customers keep their subscriptions longer, if churn (industry terminology for customer loss) goes down. "Any reacceleration [of subscribers] would be a material positive for the stock."
On Monday, shares surged $7.04 to trade at $73.63 at 11.36 am ET. In the past 52 week, the stock has been trading between $52.81 and $133.43.