Starting early 2013, Netflix Inc. (NFLX) will stream an original horror series, “Hemlock Grove”. The company acquired the exclusive rights to stream the first season, comprising of 13 episodes, and it would be Netflix’s maiden venture into the original horror series. The show is being produced by Gaumont International Television and will star Famke Janssen and Bill Skarsgard.
Netflix has been consistently updating its video library with content additions and has acquired the exclusive rights to stream original series. The improved content makes its streaming services distinguishable from other service providers.
Over the last few months, the company has acquired the rights to a number of original series, such as the comedy series “Orange Is the New Black”, and the political drama “House of Cards”. Netflix is expected to stream five original series by 2013 end.
Netflix is also picking up exclusive distribution rights to third-party productions, such as “Lilyhammer” (premiered on February 6). The company is also reviving Fox’s canceled series “Arrested Development”, which is expected to be streamed in the first half of 2013.
We believe that the new content will not only improve Netflix’s competitive edge but will also boost subscriber growth going forward. Apart from refreshed content, Netflix continues to sign a number of licensing deals with big Hollywood production houses to provide varied content, which is expected to further attract new customers going forward.
Netflix raised $400 million in cash through stock offerings at $70 per share and convertible bonds in late 2011, in order to develop its streaming library and to fund its international expansion. We believe that Netflix’s improving content portfolio and international expansion are noteworthy. Despite the higher license renewal costs, we think Netflix will probably see sales strengthening, as subscribers take note of the improving portfolio. This would ultimately enable the company to strengthen its position over the long term.
However, we believe that higher capital expenditure due to international expansion will hurt earnings growth in the near term. Moreover, increasing competition from Amazon.com Inc. (AMZN) and HBO, and the entry of Verizon Communications (VZ) into the streaming market will limit the company’s growth potential going forward.
Thus, we have a Neutral recommendation on Netflix over the long term. Currently, Netflix has a Zacks #3 Rank, which implies a ‘Hold’ rating over the short term.
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