Netflix Rallies on Takeover Rumor

The DVD and streaming video company – Netflix Inc ( NFLX - Analyst Report ) rose 1.41% and closed at $56.89 amid rumors that it might be taken over by Amazon.com Inc ( AMZN - Analyst Report ) . Netflix has surged more than 6% following its buy out rumor.

Other potential acquirers for Netflix assets may be Apple ( AAPL - Analyst Report ) , Blockbuster ( ) , Wal-Mart Stores ( WMT - Analyst Report ) , Google ( GOOG - Analyst Report ) , Microsoft ( MSFT - Analyst Report ) , Comcast ( CMCSA - Analyst Report ) , CBS ( CBS - Analyst Report ) and Sony ( SNE - Snapshot Report ) . We expect the stock to surge higher and get back to its recent high.

Year-to-date, Netflix shares are up 90.5%, outperforming the peer group as well as the S&P 500 on the back of better-than-expected earnings. Netflix outperformed the Zacks Consensus Estimate profit of 45 cents per share in the most recent quarter (third quarter of 2009).

The company announced a 44.9% increase in non-GAAP net income to $32.1 million or 55 cents per share in the quarter, up from $22.1 million or 36 cents per share in the same quarter a year ago.

The increase in profitability is attributable to better subscription services and a larger number of customers signing up for the company’s DVD-by-mail program. Netflix has a strong subscriber base, which will benefit Amazon.

NetFlix ended the quarter with a subscriber base of approximately 11.1 million, representing a 28% year-over-year growth and 5% sequential growth. Of the total subscribers at quarter-end, 98% were paid subscribers, while the remaining 2% were free subscribers.

Gross subscriber additions in the quarter represented a 43% year-over-year growth and a 13% quarter-over-quarter growth. Net subscribers rose by 510,000 in the quarter compared to an increase of 261,000 a year earlier.

We are impressed by the company’s debt free balance sheet. Netflix is sitting on $155.5 million in cash and short-term investments. Moreover, the company increased its fourth-quarter and full-year guidance.

Netflix also has plans for international expansion of its online streaming service in the second half of 2010, and expects to announce a partnership with a consumer-electronics firm in late 2009. With strong customer and earnings growth, we recommend the shares of Netflix as Neutral.