SAN FRANCISCO -- Netflix shares surged by more than 14 percent Thursday as investors bet the growing popularity of the company's Internet video service will translate into higher profits.
THE SPARK: The gains extended a rally that began Tuesday after Citigroup analyst Mark Mahaney released an upbeat report on Netflix's future. Netflix CEO Reed Hastings then reinforced the good vibes by revealing that Netflix subscribers collectively watched more than 1 billion hours of video streamed over high-speed Internet connections in June.
That's a new monthly record for Netflix and may validate a decision to increase spending on licensing rights during the past two years to expand its Internet video library as it phases out DVDs. The 1 billion-hour milestone indicated Netflix's 26.5 million steaming subscribers worldwide are now watching an average of about 38 hours per month, up from 28 hours per month late last year.
The increasing usage of the video service suggests Netflix Inc. might have an easier time retaining existing customers.
THE BIG PICTURE: Netflix is still trying to recover from its decision last year to sell its streaming and DVD plans separately, a move that raised its prices by as much as 60 percent for U.S. subscribers that still wanted both formats. The change triggered mass customer cancellations and ignited an investor sell-off that caused Netflix's stock price to plunge by more than 75 percent.
The company, which is based in Los Gatos, Calif., is also trying to regain its footing financially. The spending spree on Internet video rights will likely saddle Netflix with an annual loss this year – the first time that has happened in a decade.
THE ANALYSIS: The latest streaming data suggests Netflix's video service would rank as the seventh-most watched network among all broadcast- and cable-TV channels, according to BTIG Financial analyst Rich Greenfield. That's up from the 15th-most watched network in October, based on Greenfield's calculations.
As its service becomes more deeply immersed in more homes, Netflix may be able to attract even more subscribers.
But Wedbush Securities analyst Michael Pachter is worried TV and movie studios will increasingly see Netflix's commercial-free service as a threat to their lucrative sources of revenue from advertising and cable-TV fees.
If it appears Netflix is causing viewers to spend less time watching cable-TV channels and advertising-supported programming, Pachter suspects content providers will demand even higher licensing fees from Netflix to help make up the difference. That could force Netflix to accept lower profit margins and risk alienating subscribers with another price increase. Netflix currently charges $8 per month for its streaming service.
SHARE ACTION: Netlfix's stock gained $10.24 to $82.28 in afternoon trading. The shares have ranged from $60.70 to $304.79 during the past year.