Netflix Inc. (NFLX - Analyst Report) recently announced a multi-year partnership with Los Angeles-based Hasbro studios, a division of Hasbro Inc. (HAS - Analyst Report). The partnership will allow Netflix to exclusively stream ten renowned Hasbro shows through 2012.
The shows will be available in Netflix’s “Just for Kids” section. “Just for Kids”, as the name implies, is targeted at children aged 12 and under. Children will now have direct access to Hasbro’s favorite programs, such as “Transformers Prime”, “My Little Pony”, “Pound Puppies”, “G.I. Joe: Renegades” and “The Adventures of Chuck & Friends”. Other shows such as “JEM & The Holograms”, “Transformers: Generation 1”, “G.I. Joe: Real American Heroes”, “Transformers: Beast Wars” and “Transformers: Rescue Bots” will be streamed later in 2012.
Recently, Netflix renewed a licensing deal in Canada to boost the “Just for Kids” section. The company also announced the availability of “Just for Kids” on Sony’s (SNE - Analyst Report) PlayStation 3. Netflix expects to reach out to a larger section of its targeted audience through the addition of the PS3 platform. This move will enable Netflix to increase its popularity, as the streaming of movies and shows through gaming consoles have become a rage among youngsters. Netflix expects to add other devices like Microsoft Corp.’s (MSFT - Analyst Report) Xbox360 in the future.
Netflix has recognized that kids are among the keenest viewers of TV shows and films. This was evident from the fact that since its release in August 2011, “Just for Kids” has accounted for more than 1 billion hours of viewing. We believe that the Hasbro partnership will further boost subscriber growth going forward.
Amid increasing competition from streaming providers such as HBO, Amazon.com Inc. (AMZN - Analyst Report)), Hulu as well as 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), Netflix remains focused on boosting its streaming portfolio with varied content.
Over the years, Netflix has made a name for itself by offering new and exclusive content to its subscribers compared to the traditional content provided by some of its closest peers. Apart from recent movies and documentaries, Netflix is also boosting its original content portfolio.
In 2011, Netflix 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. We believe that Netflix’s improving content portfolio and international expansion are noteworthy. Despite the higher license renewing 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, higher capital expenditure due to international expansion will hurt earnings growth in the near term, in our view. Moreover, when compared to some of its cable and communications peers that have diversified revenue and cash flow streams, Netflix relies solely on streaming for future growth, as its DVD rental business continues to lose subscribers. We believe that the streaming market is getting overcrowded and this will hurt Netflix’s margins going forward. We provide a word of caution to investors in this respect.
We have a Neutral recommendation on Netflix over the long term. Currently, Netflix has a Zacks #3 Rank, which implies a Hold rating in the short term.