Notable Calls

Morgan Stanley is out positive on Netflix (NASDAQ:NFLX) raising their estimates and target price scenarios.

Their Base Case fair value is now $225 (up from $185).

Bull Case fair value is raised to $265.

Seizing the Opportunity: Netflix continues to capitalize on the current window of limited direct competition in its effort to build the leading, scale-based digital video platform. Morgan Stanley believes Netflix has a sustainable competitive advantage, owing to: 1) a significant lead in over-the-top device distribution; 2) an unrivaled portfolio of subscription-based digital content rights; 3) best-inclass technology architecture; and 4) an iconic brand in streaming video. While Netflix’s success will likely invite more intense competition in the coming months, they believe its scale, value proposition and consistent execution position it as a long-term beneficiary of the global secular growth in digital video.

Pricing Change Increases Scale, Drives Increased Content Investment: In Morgan Stanley's view, Netflix’s announcement of a streaming-only plan, along with a ~7-18% price increase across its hybrid (DVD + streaming) plans in the USA, highlights the company’s commitment to streaming and the competitive advantages / pricing power the company perceives in its DVD-by-mail business. While the price increase may drive churn / plan substitution higher in the USA, they believe the increased revenue from the price increase (firm is raising their C2011E revenue estimate by ~6%) will allow Netflix to continue to increase streaming content investment by 200%+ / 50%+ in C2011E / C2012E while still maintaining a 13%+ operating margin (vs. 12.5% in C2010E).

Increasing Estimates, Reiterate OW: Morgan Stanley is increasing their C2011E revenue / EPS estimates to $3.23B / $4.37 from $3.04B / $4.07, while their ending sub number remains relatively unchanged at 27.3MM, as the CQ1 price change causes ARPU to increase Y/Y after six years of declines. They reiterate their Overweight rating on Netflix as the price increase drives top-line upside and funds additional content investment, thereby improving the value proposition while maintaining operating margin levels.

Notablecalls: OK, the Bears had their fun on Friday. Now it's the Bull's turn.

As with Chipotle (CMG), Morgan Stanley is not just playing the fundies here but also the sentiment. The shorts piled on & will likely be taken for a bit of a ride. Notice the stock is down 20 pts from the recent top.

Possibly a trade here on the long side.