Talking Numbers

Forget Beats, should Apple acquire Netflix?

Forget Beats, should Apple acquire Netflix?

Netflix is raising its prices for new customers, but will that help raise its stock price or will its shares collapse like a house of cards once again?

The streaming video and DVD rental company announced that new customers will be charged $8.99 per month while its current 36 million U.S. customers will continue paying $7.99 for the next two years.

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The last time Netflix raised its prices, the markets punished the company's investors.

In 2011, the company raised its subscription price to $7.99 from $ 4.99 per month, and they would split the service into DVD rentals and streaming video. In the process, Netflix lost several hundred thousand customers and share prices went to $62.90 in November from a high of $304.79 in July.

A lot has changed since then. For one, Netflix has just about doubled its subscriber base since 2011 to 48 million worldwide. And, it now offers a lot more exclusive content, including shows such as "House of Cards" and "Orange Is The New Black," that have won awards and praise from critics.

Raising prices will likely be welcomed by investors if portfolio manager Chad Morganlander's predictions come to fruition. "There are forecasts that operating margins will increase by roughly 100 basis points for next year as well as revenue growth up around 22 percent to six and a half billion dollars for 2015," said Morganlander or Steifel Nicolaus' Washington Crossing Advisors. Steifel Nicolaus has a $475 for shares of Netflix.

But, that's not the only target Morganlander has in mind. He believes Netflix will be acquired by a larger technology company.

"I wouldn't be surprised – and I know I'm perhaps the only one saying this – that perhaps over the course of the next 18 to 24 months," Morganlander said, "there's a strategic acquisition by the likes of an Apple or a Google who have a much larger market cap."

Apple's market cap is roughly $500 billion while Google is valued at $349 billion. Netflix is worth a fraction of those numbers at about $19.4 billion.

"This could be a strategic acquisition and a nice fit for the larger mega cap technology names," Morganlander added.

Mark Newton, chief technical analyst at Greywolf Execution Partners, agrees with Morganlander that Netflix is a buy.

"Netflix is starting to look increasingly more attractive here," Newton said." It's gotten very oversold in the last couple of months."

Since reaching its all-time highs of $458 in March, shares have fallen 30 percent. Newton notes it is now near its 2011 highs of around $300 per share, a level he sees as acting as support for the stock.

"Oftentimes, these prior highs now can act as support when tested," Newton said. "There's a combination of things that suggest this area is important. You couple that with the fact that we're starting to see increasing signs of stabilization just in the last few weeks. Although the Russell [2000] and the NASDAQ have been quite weak, this stock has actually held up quite well."

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Newton expects the stock to reach $385 to $402 per share in just the next four to six weeks.
"I'm a little more concerned on the intermediate term because we have done a lot of damage," said Newton of the stock's momentum. "But for now, from a trading perspective, it looks like a decent risk/reward to take a look at here."

Disclosure: Stifel expects to receive or intends to seek compensation for investment banking services from Netflix, Inc. in the next 3 months. Stifel makes a market in the securities of Netflix, Inc.

To see the full discussion on Netflix, with Morganlander on the fundamentals and Newton the technicals, watch the above video.

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