Initiating coverage of NFLX with a 1-yr $150 price target.  Price target reflects 34x consensus 2011 EPS compared to current valuation of 47x.   Our longer term call on NFLX is decidedly negative, though quantification is much less certain due to the dynamic nature of all things internet.   The short story is 3 pronged, very simple, and nothing new, but very real:

1. Valuation:  Although we realize growth stocks like NFLX do not trade on fundamentals, eventually they all have to.  Subscribers alone do not generate cash, especially when so many of them have free subscriptions, as with NFLX.  Bulls will tell you that earnings and cash flow will eventually catch up with the lofty price, but that presumes an optimistic conversion rate of those free subscribers in an increasingly competitive field.  The sky-high valuation and impressive run since November serves to magnify the impact of the shoe when it eventually drops.

2.  Competition:  The competition is only starting to heat up, with AMZN, CMCSA (e.g. Hulu) and other well-capitalized  entities publicly declaring their intentions to get more aggressive in the space.  When internet companies compete, everyone loses, ultimately capping subscriber growth as they defect to the competition (much of which is also already free).  As content providers also increase pricing, NFLX will have no choice but to pass those increases through to their subscriber base, alienating the low end users, or see its own margins compress.

3.  Net neutrality:  Recent victories notwithstanding, the net neutrality issue is not going away.  Eventually, higher bandwidth users will be forced to pay more, and that will likely happen at the levels with pricing power (i.e. content providers and cable and wireless carriers).  Unless internet history is rendered irrelevant with some game-changing and revolutionary pricing structure, the middle man eventually gets squeezed out.  Plain and simple.