Morgan Stanley: Apple TV Won't Hurt Netflix

In a report published Monday, Morgan Stanley analysts maintained an Overweight rating on

, with a price target of $535. The market has been anxious about the new OTT platforms presenting a risk to Netflix's growth. However, these concerns fail to "differentiate among service offerings, or acknowledge how much share of time spent Netflix has already garnered (particularly powerful in context of just a $8.99 price point!)," the analysts said. The Apple TV appears to be positioned as a "linear-network led cable replacement service that is priced multiples higher than Netflix's S-VOD service." The analysts believe that there are two potential benefits for Netflix adoption in case Apple TV is successful. Any consumer savings from migrating from pay-TV to Apple TV frees up spending for ancillary services like Netflix. Apple's entry into streaming TV could drive proliferation of connected devices, with US Netflix subs expected to ultimately reach more than 50 percent of US TV households. Robust growth in user engagement and improving perception of Netflix's originals suggest "continued success of its content strategy," the analysts said, while adding, "We believe lower churn is the most immediate benefit, as consistent new content through the year lowers incentive for subs to disconnect even temporarily." Morgan Stanley forecasts domestic net adds of +452,000, which is in-line with consensus, and reflects flat gross adds and 40bps y/y reduction in churn. "This volatility is particularly acute in quarters with seasonally low net adds. We would be buyers on a market overreaction to a 2Q domestic guide shortfall. The EPS estimates for 2015, 2016 and 2017 have been reduced from $1.36 to $1.24, from $2.77 to $2.51 and from $6.98 to $6.78, respectively, to reflect currency headwinds. Despite the FX headwinds, 30 percent growth in streaming time per sub in 1Q15 "increases conviction in pricing power and we bump up long-term ARPU growth," the report added.