Netflix Stock Rises 7% Early Monday After Company Ditches Qwikster Plan

7:04 AM PDT 10/10/2011 by Georg Szalai

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The company's shares were up in early Monday trading after a reversal of the plan to separate the firm's DVD-by-rental business and a mea culpa from CEO Reed Hastings that analysts said was designed to signal that the company had listened to its subscribers.

NEW YORK - Shares of Netflix rose in early Monday trading after the company said it would ditch its plan to separate its DVD-by-mail from its streaming service by creating Qwikster.com for DVD rentals.

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As of 9:50am ET, Netflix's stock was up 6.8% at $125.13, giving it a market value of $6.57 billion. A few minutes earlier, it was up slightly more than 7 percent. That was up from the stock's late September 52-week low of $107.63, but well below a July high of $304.79.

Lazard Capital Markets analyst Barton Crockett called the news "a good choice by Netflix," maintaining his "neutral" rating on the stock.

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Janney Montgomery Scott analyst Tony Wible said the news confirmed that "these guys are desperate and they will try to accelerate the positives to reverse recent momentum and rebuild optimism."

While the latest decision is "probably a good move for consumers" designed to stem subscriber losses, he said he was "not sure the harm they caused can be reversed."

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Before the reversal from Netflix, including a mea culpa from CEO Reed Hastings in a blog post, Wible had on early Monday upgraded his opinion on Netflix's stock from "sell" to "neutral," while maintaining his fair value estimate of $102 per share.

"We believe there is a more balanced risk/reward until a new baseline of sub metrics is established around the third-quarter results," he argued. "Netflix is motivated to rebuild investor confidence on the upcoming earnings and may use it to talk up potential positive catalysts, international prospects and/or strategic options."

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Other Wall Street observers also said Monday's reversal was designed to bolster subscriber and investor confidence in Netflix.

BMO Capital Markets analyst Edward Williams said that Monday's news means that Netflix is "sticking with what works." But he argued that the stock could remain volatile until the subscriber impact of management's recent moves becomes clearer. He maintained his "market perform" rating on the stock.

Wedbush Securities analyst Michael Pachter called Netflix's back-paddling "a return to sanity" adding that the plan to separate the streaming and DVD rental businesses "made no business sense whatsoever, unless to position the company for a sale," specifically a sale of the streaming business to Amazon.com.

"The reversal tells me that Amazon is not buying Netflix's streaming business and tells me that Reed's insanity was temporary," Pachter said. "If Netflix is going to remain independent, the split-up made no sense at all, and the backtracking was necessary to repair and restore customer relations."

Email: Georg.Szalai@thr.com

Twitter: @georgszalai