In a bid to supplement its original content, Netflix Inc. (NFLX) recently announced the premiere of Lilyhammer on February 6, 2012. Set in Norway, the original series portrays the histrionics of a New York mobster Frank “The Fixer” Tagliano, after he betrays his boss. The eight-episode series stars E Street Band guitarist Steven Van Zandt, who also portrayed a similar character in HBO’s popular series The Sopranos.
Lilyhammer is Netflix’s third original series over the last 12 months. Earlier, in 2011, Netflix announced the streaming of Arrested Development and the Kevin Spacey-starrer original political drama House of Cards. Netflix will start streaming House of Cards later this year. In the first half of 2013, Netflix is expected to stream new episodes of the canceled Fox comedy Arrested Development.
Lilyhammer will be available across all Netflix territories. All eight episodes of the first season will be available at the same time, so that subscribers can watch all the episodes back-to-back, and do not have to wait for a week to catch the next episode as in the case of traditional viewing. We believe that the new series will boost Netflix’s customer base going forward.
We believe that such a strategy is important for Netflix as the company lingers at the bottom in terms of customer satisfaction. As per the latest data from research firm ForeSee, Netflix was among the worst performers with respect to customer satisfaction among the largest online retailers this holiday season. The drop is significant considering the fact that Netflix was the joint leader in the 2010 holiday season and has been one of the top-performers historically.
The decline has been primarily attributed to Netflix’s decision to raise prices (by 60%) and splitting its DVD and video-streaming services. Although Netflix backtracked on its decision to split up the business, this was mainly on account of an 800K subscriber loss in the third quarter of 2011. Moreover, the turn of events was reason enough to confuse both analysts and investors.
Analysts believe that this debacle not only damaged Netflix’s customer base but also helped its rival Amazon.com Inc. (AMZN) to gain an upper hand in terms of customer satisfaction. Amazon topped the ForeSee list with a score of 88; and the gap between Amazon and Netflix (which used to hover around 1-2 points over the last couple of years) widened considerably (9 points) this year. Analysts believe that Netflix will find it increasingly difficult to reduce this gap going forward.
However, we believe that Netflix will not give up so easily and its refreshed content will help its growth going forward. Moreover, Netflix continues to sign a number of licensing deals with big Hollywood production houses to provide varied content. Recently, Netflix raised $400 million in cash through stock offerings at $70 per share and convertible bonds. We believe that the proceeds from the transaction would also help Netflix to develop its streaming library, particularly in the domestic market, to attract new subscribers going forward.
Recommendation
We maintain our Neutral recommendation over the long term (6-12 months). Despite the higher costs, we think Netflix will probably see sales strengthening, as subscribers take note of its improving portfolio. This would ultimately enable the company to build a position for itself over the long term.
However, we believe that increasing costs related to licensing and renewal fees and higher capital expenditure due to international expansions can hurt growth in the near term. We currently have a Zacks #3 Rank on Netflix, which translates into a Hold rating in the short term.
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