Stifel Equity Trading Desk analysts Benjamin E. Mogil and Kevin Lee Hon Siong rate Netflix, Inc. (NASDAQ:NFLX) as a Buy as the online streaming giant undergoes changes.

Netflix

We are transferring coverage of Netflix, Inc. (NASDAQ:NFLX) from George Askew to Ben Mogil and establishing a Buy rating and a $475 target price. Central to our favorable view is: 1) Netflix’s lack of pricing increases despite vast programming improvements over the last few years coupled with its expanded pricing trials, makes the service attractive to both cord-nevers as well as heavy video users, driving subscriber growth and margins; 2) Unlike music streaming services, SVOD window/content exclusivity allows SVOD players to have more sustainable margins, particularly for the market leader (Netflix); 3) Expansion into pre-school programming and Western Europe will expand company margins and FCF starting later this year. We rate Netflix with a Buy rating and $475 target price.

What’s New? We are transferring coverage of Netflix and establishing a Buy rating and a $475 target price.

Main investment theme for Netflix

In an environment where video subscribers are increasingly bi-polar in their consumption and plan choices, Netflix, Inc. (NASDAQ:NFLX) remains a very attractive programming option suited for this environment. Despite a significant addition of programming upgrades over the last few years, the service’s price has not increased, making it very attractive for cord cutters/nevers/shavers. Conversely, for heavy video users, the addition to Netflix of original programming and licensing of high profile television content justifies the service even for this group which already has premium pay-TV subscription(s). Both of these groups’ trends support our 2015 subscriber estimates.

Unlike Internet music streaming services, which have had limited profitability to date, we believe SVOD’s focus on content/window exclusivity allows services to be differentiated, granting tremendous margin potential, given fixed programming costs. Similar to the way in which content exclusivity has allowed satellite radio to grow despite Internet radio’s proliferation, we see the same trajectory for Netflix despite other competing offerings.

Going forward, we anticipate two major investment areas: 1) While the company’s programming for kids (and walled kids area) has been well discussed, our channel checks indicate that pre-school programming will be the next focused investment area. We view this group focus as aiding in customer acquisition and churn reduction. 2) We are anticipating international expansion into France, Germany and Italy, all of which have market characteristics similar to Canada and the U.K., both of which were successful launches.

Netflix valuation

We are Buy rated with a $475 target price for Netflix, Inc. (NASDAQ:NFLX). In addition to traditional valuation metrics, we also employ a EV/streaming subscriber value, which we believe reflects the tremendous market head start the company has competitively.