Netflix Moves Up in Class

Netflix (NFLX Quote) vs. Blockbuster (BBI Quote) is history. Long live Netflix vs. Apple (AAPL Quote).

If a company's status can be measured by the rivals that analysts and journalists pit it against, then Netflix has just taken a big step up in the world.

In a research note on Thursday that gave Netflix's stock a brief pop, Lehman Brothers analyst Douglas Anmuth upgraded Netflix shares, saying that the company will "transform" the video rental industry.

The report sent Netflix stock up 5% to $28.49 early Thursday, its highest level in nearly three weeks (it closed at $27.67, up 2%, amid a broad decline in tech shares). Blockbuster's stock fell 2.3% to $4.61 Thursday. Netflix's market value has not only surpassed Blockbuster's $879 million capitalization, at $1.65 billion it's nearly twice as big.

Strong customer satisfaction is causing Netflix's subscriber base to grow faster than Anmuth had expected: He now says it will expand to 5.24 million at the end of the current quarter, up from his previous estimate of 5.2 million; and to 6.47 million at the end of this year, revised up from 6.4 million.

That growth is giving Netflix a critical mass of subscribers that, Anmuth said, will mean "stronger word-of-mouth advertising and driving further closures of traditional retail rental stores." In other words, the gold-and-blue blockbuster signage in your local strip mall will soon find its way on the endangered-species list. Blockbuster closed 4% of its U.S. stores last year and is poised to close more this year.

This isn't news to investors who drove up Netflix's stock above $39 in early 2004 -- a rally predicated on the belief that Netflix would become the premier provider of DVDs.

It is news, however, for naysayers who drove the stock down below $9 in March 2005. Since that time, Netflix has more than tripled.

So, while the early Netflix bulls pat themselves on the back, other investors are turning their focus to what lies ahead: digital movies streamed over the Net and into the homes of film buffs. Netflix customers and investors have been calling for this for years. Only now is that tantalizing goal starting to come within reach.