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Netflix's stock emerged as a bright spot Wednesday during a dreary day on Wall Street. It got a boost from signs that the Internet video service is warding off its competition, while many investors are hoping the company's market leadership will attract a lucrative takeover bid.
THE SPARK: A report Wednesday measuring the usage of Internet services found that Netflix's library of movies and old TV shows remains a popular draw among Web surfers, even as Amazon.com Inc. and other companies expand their online video selections.
Netflix Inc.'s video accounted for one-third of streaming during peak hours in North America, according to the analysis released by the research group Sandvine. That easily outdistanced second-place YouTube at 15 percent and, more importantly to investors, was far ahead of other Internet video subscription services trying to topple Netflix. Amazon.com accounted for less than 2 percent of the peak usage, and two other major Netflix rivals — Hulu.com and HBO's online service, Go — were even farther behind, according to Sandvine.
In another heartening sign, Sandvine said Netflix's streaming share remained largely unchanged from last year, despite a sharp price increase that infuriated hundreds of thousands of the company's subscribers.
"Even in the face of increased competition ... Netflix continues to define the market for long-duration video streaming in North America," Sandvine said in its report.
Netflix, which is based in Los Gatos, Calif., ended September with 25 million U.S. subscribers to its $8-per-month video streaming service. The service is also available in Canada and Mexico, but the company doesn't break out how many customers it has in those countries.
Netflix's big lead in Internet video is the main reason activist investor Carl Icahn has bought a nearly 10 percent stake in the company. He believes investors have been underestimating the value of Netflix's franchise, opening the door for potential takeover in the company. More investors have been betting that a Netflix suitor will emerge since Icahn disclosed his holdings last week.
The takeover potential is one of the reasons that Cantor Fitzgerald analyst Youssef Squali thinks this is a good time to buy Netflix's stock. In a Wednesday note to investors, Squali raised his price target on Netflix shares from $68 to $85.
THE BIG PICTURE: Despite the company's success, Netflix remains a risky investment. Many shareholders are already acutely aware of the perils. Despite a recent run-up, Netflix's stock remains more than 70 percent below its peak price of nearly $305 reached nearly 16 months ago.
Netflix's financial performance has been hurt by several factors. It is spending to expand into more markets outside the U.S. at the same time movie and TV studios have been demanding higher licensing fees for Internet video rights. In addition, it is losing subscribers to its more profitable DVD-by-mail service.
Amazon.com Inc. also keeps turning up the competitive heat. In its latest move, Amazon this week began offering people a chance to get its video-streaming service and free shipping on purchases from its online store for $8 per month. Previously, Amazon had only been selling that bundle, known as Prime, for $79 annually. Although the monthly fee translates into more money on an annual basis, the short-term option may appeal to more people who don't want to subscribe to the service throughout the year.
The flexibility to subscribe to Netflix on a month-to-month basis is one of the features that has appealed to many subscribers, especially those living in lower-income households.
THE ANALYSIS: Like much of Wall Street, Sqauli thinks Amazon is the company most likely to buy Netflix. He also cited Microsoft Corp., Apple Inc. and Google Inc. as potential bidders and thinks major entertainment companies might enter the picture if Netflix goes on the auction block.
Netflix so far hasn't given any indication that it's interested in selling. The company has adopted an anti-takeover provision known as a poison pill to thwart an unwelcome bid.
Even if Netflix remains independent, Squali expects Icahn to wield his stake to try to win representation on Netflix's board so he can push for other changes that might boost the company's stock.
SHARE ACTION: Netflix's stock gained $1.50, or 2 percent, to $77.87 in afternoon trading. The shares have ranged from $52.81 to $133.43 in the past year.