The Zacks Analyst Blog Highlights:Netflix, Comcast, Verizon, AT&T and Illumina

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May 13, 2014, 09:30 ET

CHICAGO, May 13, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Netflix Inc. (Nasdaq:NFLX-Free Report), Comcast (Nasdaq:CMCSK-Free Report), Verizon (NYSE:VZ-Free Report), AT&T (NYSE:T-Free Report) andIllumina Inc. (Nasdaq:ILMN-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Monday's Analyst Blog:

Netflix Hikes Price for New Users

As announced earlier, Netflix Inc. (Nasdaq:NFLX-Free Report) recently raised its subscription prices. Domestic new subscribers will now pay $8.99, which is a $1.00 hike from the previous pricing plan of $7.99 per month. International new subscribers (Europe and United Kingdom) will be paying a little bit more than $1.00 due to foreign currency conversions.

The modest price increase reflects Netflix's cautious approach as it does not want to repeat the 2011 debacle. In Jul 2011, Netflix raised the prices of its combined streaming and DVD-rental package by 60% that enraged customers, resulting in substantial subscriber loss.

The company's decision to split the DVD business into a separate entity also did not go down well with investors. Netflix's share price plummeted from a high of $300.0 in July to a low of $60.0 by the end of 2011.

However, we believe that the current price increase will not hurt Netflix's growth prospects due to the selective nature of the plan and measured approach. Streaming prices are only increasing for new users, as existing subscribers in both the regions will enjoy the current $7.99 plan for the next two years. The company is also keeping the prices for the loss-reporting DVD segment same.

Netflix's superior content portfolio is a major attraction for subscribers. The company's growing investments in original program pipeline will boost subscriber base. Its continuous focus on improving customer engagement will also play a significant role in limiting any churn rate due to this price increase.

Netflix is completely dependent on its streaming service that accounted for almost 90.0% of the revenues in first-quarter 2014. Streaming revenues jumped 45.8% from the year-ago quarter to $1.14 billion. Most significantly, streaming contribution margin surged to 18.5% from 7.0% reported in the year-ago first quarter.

To ensure better streaming quality, Netflix has agreed to pay annual fees to Comcast (Nasdaq:CMCSK-Free Report) and Verizon (NYSE:VZ-Free Report). However, these agreements are expected to increase Netflix's operating costs. Moreover, the Federal Communications Commission's (FCC) recently proposed rule that will allow Internet Service Providers (ISPs) to charge fees for faster connections is a headwind for Netflix.

The new rule will allow other ISPs such asAT&T (NYSE:T-Free Report) to demand additional fee for better transmission quality, which will add to Netflix's already rising cost burden. Netflix has $7.25 billion due for content streaming obligations, out of which $2.97 billion needs to be paid within the next 12 months. After that period, Netflix needs to pay $3.27 billion within the next three years.

In such a scenario, the modest price increase will help Netflix to somewhat offset the rising operating costs in the near term. We believe that Netflix's expanding content portfolio, innovative content pipeline for the second half of 2014 and expansion into new international markets are the major positives that will continue to boost its subscriber base.

Currently, Netflix has a Zacks Rank #3 (Hold).

Illumina Upgraded to Strong Buy

On May 10, we upgraded Illumina Inc. (Nasdaq:ILMN-Free Report) to a Zacks Rank #1 (Strong Buy). The upgrade came on the back of better-than-expected first-quarter 2014 results and an improved 2014 guidance. Illumina is a life sciences company focused on the development and commercialization of DNA microarray and high throughput DNA sequencing tools for large-scale genetic analysis.

Why the Upgrade?

Illumina displayed a strong operating performance during the first quarter and easily outpaced earnings estimates. While adjusted earnings per share (EPS) of 53 cents, which were up 15.2% year over year, breezed past the Zacks Consensus Estimate of 44 cents, revenues climbed 27.1% to $420.8 million, surpassing the Zacks Consensus Estimate of $391 million. This marks the tenth quarter of sequential growth at the company.

The company benefited particularly from the strong worldwide demand for products, particularly for its new instruments – NextSeq 500 and HiSeq X Ten and solid contributions from the sequencing business. Moreover, on the back of solid results across more than 15 different metrics including shipments and orders for sequencing instruments and services as well as HiSeq and MiSeq consumables, Illumina delivered record orders, shipments and revenues in the first quarter of 2014.

Based on its strong first-quarter results and increased demand for HiSeq X Ten, Illumina revised its business outlook for full year 2014. The company now expects adjusted EPS in the range of $2.10–$2.15 (from earlier provided range of $2.00 –$2.06). Revenues are expected to increase at an annualized growth rate of 21%–23% (earlier 15%–17%).

Going forward, Illumina's prospects seem strong on the back of strong global demand for its products and an attractive portfolio along with successful launch of new products like NextSeq 500 and HiSeq X Ten. With the proposed launch of the pre-implantation genetic screening product – VeriSeq PGS to be used on the popular MiSeq platform and a dedicated management team, we believe Illumina is well positioned to exploit a more than-$20 billion market opportunity and eventually meet its revised guidance.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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