The Walking Dead Walks into Netflix

By virtue of the multi-year licensing agreement that Netflix Inc. (NFLX - Analyst Report) and AMC Networks Inc. (AMCX - Snapshot Report) recently entered into, the former will be able to stream season 1 of The Walking Dead exclusively in the U.S. and Canada.

The deal also provides Netflix the rights to stream additional seasons of the series. Certain other programs will be available for streaming just prior to the premiere of the season’s telecast. Though the financial terms of the deal were not disclosed, analysts estimate that Netflix is paying AMC Network approximately $35 million for the rights.

Netflix has also gained the non-exclusive rights in the U.S. to stream certain scripted and unscripted shows from AMC Networks’ portfolio (AMC, IFC, Sundance Channel and WE TV) that comprises Portlandia, The Increasingly Poor Decisions of Todd Margaret, Braxton Family Values, My Fair Wedding, Bridezilla, All On The Line with Joe Zee and Girls Who Like Boys Who Like Boys to name a few.

This would be Netflix’s third major licensing agreement, the previous two being with DreamWorks Animation SKG Inc. (DWA - Snapshot Report) and Discovery Communications.

Netflix has been reeling under pressure from Telefonica SA’s TerraTV and Net Servicos de Comunicacao SA in the Latin American region. Additionally, Netflix recently lost out on the Starz deal after talks between the parties fell through due to disagreements on licensing fees. Since then, Netflix had been searching for alternative content providers that can match the ranks of Walt Disney Co. (DIS - Analyst Report) and Sony Corp. (SNE - Snapshot Report). Netflix, after its subscription pricing debacle and splitting of the company in two, has left investors confused and flustered. Over the last two months, the company has lost about $8 billion worth of market cap and about a million subscribers due to its recent initiatives.

However, we believe that the digital video service will be the key growth driver for Netflix in the long term. Higher adoption by mobile and tablet devices coupled with increasing broadband penetration will be the primary reason for this, in our view.

Content additions will enable Netflix to reduce its dependence on cable TV operators and provide it with the necessary competitive edge over its peers in the emerging market of online video streaming. Moreover, strategic partnerships will also be beneficial, helping it to expand its geographical footprint.

However, intensifying competition from large players such as Amazon.com Inc. (AMZN - Analyst Report), Apple Inc. (AAPL - Analyst Report) and Google Inc. (GOOG - Analyst Report) in the online streaming market is a headwind, as it will further push up license fees and also affect subscriber additions.

We maintain our Neutral recommendation on Netflix over the long term (6-12 months). Currently, Netflix has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.