Netflix New Price Target $300

Upgrading NFLX to Buy w/ $300 PT — We have long considered NFLX a ‘Net Sector Core Holding, one that has benefitted from Flywheel Factors. Our challenges re: the stock have been uncertainty over its U.S. growth sustainability, uncertainty over its U.S. margin potential, uncertainty over its International expansion, and, most importantly, valuation. Recent trends, disclosures, and analysis have changed our minds.

1. NFLX's U.S. Revenue Growth Is Sustainable, with a Path to 50MM Subs by 2013 — This implies Netflix becoming almost a Video Utility. But it already has 27% U.S. Broadband HH Penetration. Further, NFLX's Penetration ramp has been accelerating. And 3 factors suggest the ramp is sustainable: the lack of current direct competition to NFLX's Price, Selection & Convenience offering; the moving-to-mass market adoption of Tablets; and the still early stage of the Video Streaming S-Curve.

2. NFLX's U.S. Margin Trends Demonstrate Model Levers-Ability…and EPS Upside — NFLX not only generated record high 16% U.S. Op Margins in Q1, it has sustained 20%+ U.S. Incremental Op Margins despite significant Streaming Content investments. This, along with competitor Operating Margin achievements, suggest the potential for material long-term U.S. Op Margin expansion for NFLX. Every 100 bps of U.S. Op Margin expansion generates almost $0.50 in incremental EPS.

3. NFLX Faces a Significant International Opportunity – The fact that NFLX achieved 8% Canadian Broadband Household penetration within 7 months is KEY. And our analysis of NFLX's International market penetration potential suggests several million incremental Subs within 18-24 months. We think investors will increasingly look at NFLX's International Segment as a valuable Option Play.

The challenges in recommending the stock has been:

1) uncertainty over the sustainability of NFLX U.S. growth; 2) uncertainty over its U.S. margin potential; 3) uncertainty over its International expansion efforts; and 4) valuation, most importantly. Recent trends, disclosures, and analysis have changed our minds. Taiwan Semiconductors: Application Processor Operations Likely to Be Halted