Netflix to Stream Spanish Programs

In a bid to cater to the 50 million-strong Spanish-speaking population and strengthen its subscriber base in the US, Netflix Inc (NFLX - Analyst Report) is currently in talks with Univision Communications Inc, a Spanish language media company, according to Bloomberg. Netflix already shares a healthy business relationship with Univision, as the latter provides online content for the company in Latin American countries.

The essentials of the deal are still under wraps but it is expected that Netflix is set to stream popular shows from the largest Spanish language broadcaster Grupo Televisa SAB (TV).

Amid increasing competition from domestic streaming providers such as HBO, Amazon.com Inc. (AMZN - Analyst Report) and Hulu, the addition of Univision in Netflix’s portfolio provides a much-needed boost. Newly launched services from cable and media companies, such as Comcast Corp. (CMCSA - Analyst Report), Dish Network Corp. (DISH - Analyst Report) and Verizon Communications (VZ - Analyst Report) also remains a challenge for Netflix. Despite the threats from some of the bellwethers in the industry, Netflix remains focused on boosting its streaming portfolio with varied content.

Netflix’s recent licensing deals include a multi-year exclusive licensing deal with The Weinstein Company that will enable the former to stream TWC-produced movies online within one year of their theatrical release. Apart from the licensing deals to stream movies, the company has been picking up exclusive distribution rights to third party productions, such as “Lilyhammer” (premiered on February 6). The company is also reviving Fox’s canceled TV series “Arrested Development,” which is expected to be streamed in the first half of 2013.

Moreover, to diversify its streaming content and make it worth watching, Netflix is building its original content portfolio. 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” in 2011. Netflix is expected to stream five original series within the first half of 2013.

In the recently concluded quarter, Netflix gained 600K subscribers (both domestic and international), with the domestic subscriber base growing by approximately 220k.

We believe that Netflix’s improving content portfolio and international expansion are primarily responsible for the significant expansion of its subscriber base. This would ultimately enable the company to strengthen its position over the long term.

However, higher capital expenditures arising from international expansion will hurt earnings growth in the near term, in our view. Moreover, Netflix had earlier raised $400 million in cash through stock offerings at $70 per share and convertible bonds, in order to develop its streaming library and to fund its international expansion.

Additionally, Netflix’s future growth and strategy is entirely based on the online streaming business, as its DVD rental business continues to witness subscriber losses. We believe that the streaming market is getting overcrowded and will hurt Netflix’s margins going forward.

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.