William Blair analyst Ralph Schackart upgraded Netflix (NFLX) to Outperform, a buy-equivalent rating, saying he sees more room for revenue growth in the U.S. than appreciated as its younger users get older and become more likely to pay for the streaming service. Furthermore, the analyst believes that Netflix's domestic subscription revenue could be boosted if password sharing were curbed.

UPSIDE POTENTIAL: William Blair's Schackart upgraded Netflix to Outperform from Market Perform as he sees upside potential of roughly 50% and a favorable long-term risk/reward for the stock. Despite concerns about U.S. subscribers in the last quarter, the analyst said he expects Netflix to benefit as its audience of nonpaying, often younger users transition to ages at which they become more likely to pay for the streaming service. If Netflix converts 3% of this audience to new subscribers, the analyst estimates it would add 5.3 million subscriptions by 2020 as a result of this aging affect alone. According to Schackart's survey of viewership trends, Netflix could boost its domestic subscription revenue from streaming by roughly 40%-60% if password sharing were curbed. Moreover, the analyst noted that, by 2020, 74% of broadband users, or 62% of the U.S. population, is expected to stream from at least one subscription Over-The-Top content service, which will be a 38% increase. Given Netflix's 70% penetration in the OTT market, the company could add over 12M domestic subscriptions, he contended.

ORIGINAL, CRITICALLY ACCLAIMED CONTENT: The analyst also told investors that he believes that Netflix's original and "critically acclaimed" content will only "gain steam" and further differentiate the service. Citing his proprietary content benchmarking study, Schackart added that the company has nearly double the above-average original series still releasing new content than the networks next in line. Further, the analyst pointed out that Netflix's sequel opportunity seems to be underappreciated by investors, given that it can leverage the previous marketing spending and build longer-term franchises.

WHAT'S NOTABLE: On July 18, Netflix fell short of its second quarter 2016 subscriber forecast by 370,000, citing the "un-grandfathering" monthly price increase, and guided to 300,000 net subscriber additions for the third quarter, below the Street forecast of 774,000, Schackart pointed out.

PRICE ACTION: In morning trading, shares of Netflix have gained over 2% to $97.21.