Morningstar Raises Fair Value Estimate on Netflix

Netflix remains committed to investing in proprietary content, which we believe will deliver excess returns on capital. Management discussed its plan to create programming aimed at different demographics versus content designed to appeal to all demographics. We expect Netflix's programming will continue to move from being primarily prestige shows (House of Cards) to a more expansive slate with the prestige shows surrounded by niche-focused shows such as Fuller House and the DreamWorks content.

International expansion continues to track ahead of expectations on the subscriber side as Netflix now has 21.7 million paid streaming subscribers, up from 12.9 million in the year-ago quarter and 7.0 million in the second quarter of 2013. The firm plans to enter Japan in the third quarter and Italy, Portugal, and Spain in the fourth quarter. Given Hulu's problems in Japan, we believe management's move to temper expectations for the market is prudent. Netflix maintains that the international rollout will be complete by the end of 2016; we project the firm will complete its rollout in most markets but expect delays in markets with regulatory barriers, such as China.

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