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How Netflix Has Almost 30% Upside

Tickers in this article: NFLX AMZN BBY BKS

NEW YORK ( TheStreet) -- One investment bank thinks Netflix (NFLX) bears have had their fun, and there may be close to 30% upside in shares.

Morgan Stanley analyst Scott Devitt upgraded the Internet video provider to "overweight" with an $85 price target, noting that Amazon's (AMZN) not a direct threat to Netflix's U.S. business. "We believe the primary driver of content revaluation was Netflix's own success," he wrote, in his note. "Netflix is poised to leverage its domestic cost structure and potentially become the global video platform."

Devitt does not believe that Amazon will unbundle Prime Instant Video from Prime anytime soon, and continue to use the "freemium model," with Prime users getting free content, then renting movies from Amazon to enhance their experience.

TheStreet Ratings has a "hold" rating on Netflix shares, due in part to very low net profit margins (0.70%), and declining net operating cash flow (down 77.2% to $19.69 million).

Netflix's business model has come under attack in recent weeks, as companies like Toys "R" Us launch their own video-on-demand services . Other competitors such as Barnes & Noble (BKS) and Best Buy (BBY) continue to beef up offerings as well.

Should Amazon offer a standalone product, the Seattle-based online retailer will face issues that have plagued Netflix, rising content costs, adding perhaps as much as $1 billion to $1.2 billion in incremental costs.

Though Netflix shares are pricey, trading at 73 times 2013 estimated earnings according to Yahoo! Finance , Devitt said the domestic business alone should support the current share price, not taking into account the international opportunities and costs Netflix faces going forward.

If churn (industry terminology for customer loss) goes down, Netflix should see lower flux in revenue, and an increase in margins, as customers keep their subscriptions longer. "Any reacceleration of subscribers would be a material positive for the stock," Devitt noted.

Bears have often wondered about rising content costs, and the company has given them ammunition to do so, given its recent outlook. During its most recent quarterly results , Netflix forecast third-quarter earnings that range from a loss of 10 cents a share to a profit of 14 cents a share. On the top line, the Los Gatos, Calif.-based firm expects revenue ranging from $890 million to $911 million. Netflix struck a positive tone in its commentary.

"Q3 has begun strongly for us, and we expect to be profitable again in Q3. In Q4, we will launch our next international market, which will drive us temporarily back into the red," wrote CEO Reed Hastings and CFO David Wells.

If Netflix is able to negotiate global content deals instead of localized ones, and the company's original programming causes lower churn, these are incremental positives for Netflix. Netflix's first major original programming, House of Cards , will premiere on February 1, 2013.