High Noon for Netflix

Netflix is ending 2006 with something of a cliffhanger: Will our intrepid hero, mired in a swamp of rising costs, be slain by archrival Blockbuster ? Or will it escape to scale new heights of market cap?

Analysts have been debating the outcome like obsessed cinephiles in the chat rooms of JoBlo.com.

The plot thickened earlier this month when Bank of America analyst Brian Pitz set a $24 target on Netflix with a warning about falling operating margins. The stock, which was trading at $28.40 before the report, has lost 5.5% of its value. (Netflix shares were recently up 2.4% to $26.82.)

Pitz's dim view was a departure from the largely bullish assessments that Wall Street had for the DVD-rental company in the wake of a stronger-than-expected third quarter.

Pitz argued that higher spending on marketing (23% of revenue in 2006, up from 18% three years ago), and an anticipated $40 million the company will spend to get ready for digital downloading of movies, will pressure margins even as Blockbuster is pushing a new service that will couple its online rentals with cheap and easy access to its stores.

"We could see ... operating margins coming under more pressure than the Street anticipates," Pitz wrote. "Shares (and ultimately earnings) of other Internet companies such as Amazon , eBay , Yahoo! and GSI Commerce have declined as a result of operating margins being impacted by spending initiatives." Bank of America has no underwriting relationship with Netflix.