Mixed messages for new media

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The first month of the new year was a confusing one for the shares of new-media companies.

Shares of XM Satellite Radio fell 1.7%, while rival Sirius Satellite Radio advanced 4.2%. TiVo Inc. rose 4.5%, and competitor NDS Group dropped 1.8%.

Netflix Inc. fell 11.8%, but bricks-and-mortar competitor Blockbuster Inc., which is seeing more success with its online offering dubbed Total Access, saw its shares surge 23%.

Napster, which competes with RealNetworks Inc. in the subscription digital music space, saw its stock move 9.9% higher compared with a 2.5% fall for RealNets.

It seems the only spot where a bit of consistency could be found was in online search, with shares of Yahoo! Inc. advancing 10.8% last month and Google Inc. shares rising 8.9%.

Google reported quarterly earnings last week that Goldman Sachs analyst Anthony Noto called "generally in-line with investor expectations."

Several analysts, however, said that investors have become accustomed to such large outperformance by the company that anything less hurts the stock.

Noto stuck to his $595 price target. The stock ended the month at $501.50.

The same analyst was less impressed with Yahoo! and removed the stock from his firm's "Americas Buy List," estimating about 10% upside in the course of a year given his $31.50 price target. Yahoo! ended the month at $28.31.

Others are enthusiastic about Yahoo! because its search initiative, Project Panama, is back on track and ought to help boost its profit in the second half.

Merrill Lynch analyst Justin Post reiterated his "buy" recommendation last month and $33 price target, while Jefferies & Co. analyst Youssef Squali reiterated a "buy" rating and $38 target.

"The stock may trade sideways short-term," Squali said. "But resurgence of growth in display ads, expected improvement in search monetization and attractive valuation should drive it higher throughout 2007."

Netflix reported stronger-than-expected financial results last month and disclosed details of its Internet delivery system for on-demand movies, though none of that helped much.

Citigroup analyst Tony Wible said the on-demand product, Watch Now, "seems compelling," and he reiterated his "buy" recommendation and $33.50 price target. The stock closed the month at $22.81.

Blockbuster, meanwhile, has been good to investors this year, as was the case in the late 2006. The stock's 22.7% gain in January is on top of a 35% gain in the last two months of 2006.

Blockbuster's Total Access ended last year with 2 million paying subscribers, about 150,000 more than Pali Research analyst Stacey Widlitz figured.

"Online subs surpass(ed) even the most optimistic expectations," she said, though her $6.30 target price on shares suggests that they will be stuck in the mud for the next year or so.

Wible shares the sentiment, raising his target from $6.25 to $6.50, just a penny shy of where Blockbuster traded at month's end.

Despite a small decline in share price for XM, rumors still abound that the company might eventually merge with Sirius, which has the bigger market capitalization but smaller subscriber base.

XM recently announced extensions with American Honda until 2016 and with Toyota Motor Sales USA until 2017. Merrill Lynch analyst Laraine Mancini said the deals should ensure that XM remains the leader in the original equipment manufacturer market, while Sirius, with the Howard Stern advantage, will lead at retail outlets. That should translate into a 50-50 split of new subscribers for the two going forward, giving XM leverage in any merger discussions.

"XM would likely use its long-term contracts to justify a 50% or better stake in a merged company," Mancini said.

While she remained "neutral" on the stock, she said her "long-term outlook remains positive for the industry, and we believe a potential merger could provide additional upside."
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