Netflix, Inc. (NASDAQ:NFLX) has received a price boost from Morgan Stanley (NYSE:MS) analysts following its agreement with The Walt Disney Company (NYSE:DIS) on a new film licensing deal. Analysts are of the opinion that the deal could affect the broader premium TV sectors.
In a report published Wednesday, Morgan Stanley analysts Scott Devitt and Andrew Ruud reiterated Netflix, Inc. (NASDAQ:NFLX) at overweight, and raised the company's price target from $80 to $105 per share, which represents about a 22.1 percent price boost for the online films and video streaming company, as per Tuesday's close.
In the report, the analysts wrote, "Our valuation is based on a probability-weighted scenario analysis of the Disney content’s effect on Netflix. We increase our Domestic EBIT valuation multiple from 7x to 9x (back to our original multiple when we upgraded Netflix) based on our view that exclusive content may offset competitive risk. Our $105 price target still values Netflix at only 1.4x 2013 revenue, which could prove conservative".
The agreement is Netflix, Inc. (NASDAQ:NFLX)'s second output deal with a major film studio and to add on top of that; Disney is one of the most successful film franchise companies. The analysts believe that this is just the beginning of a series of similar deals between Netflix and other film studio companies. "We believe this precedent, may open the door for Netflix to sign additional direct output deals with other studios," the analysts wrote.
The inclusion of The Walt Disney Company (NYSE:DIS) to Netflix's portfolio makes the Internet-based company stand out from the competition, as it makes the company unique. The analysts noted that quality precedes quantity when it comes to this type of industry and believe that the addition of Disney guarantees quality content.
The analysts wrote, "We believe it’s not about having everything, it’s about having the best, and right now, Netflix clearly has the best content portfolio, domestically. Amazon.com, Inc. (NASDAQ:AMZN) Prime Instant Video remains highly commoditized with no exclusive content, currently."
Some of Netflix's competitors have a slight advantage in terms of content costs. For instance, the analysts pointed out that Starz might be paying less for Disney content currently, but they also believe that the new agreement does pave the way for further negotiation on fees during renewals. Nonetheless, they still believe that Netflix can afford to pay for the content at current rates.
In other news, Moody's Corporation (NYSE:MCO) downgraded Netflix, Inc. (NASDAQ:NFLX) credit rating from Ba2 to Ba3 citing that the company's shift to fixed cost streaming services could affect the company performance. In a report published by Reuters, Moody's wrote, The downgrade reflects the higher risk surrounding the company's shift to a fixed cost streaming business model, which requires much higher subscriber levels to reach profitability, combined with an increasingly competitive operating environment".
Netflix, Inc. (NASDAQ:NFLX) closed at $86.08 on Tuesday.