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Streaming services provider, Netflix Inc. (NFLX - Analyst Report) recently announced that it has entered into a multi-year licensing deal with RADiUS-TWC, the new multi-platform distribution label from The Weinstein Company (“TWC”). Under the terms of the agreement, Netflix will stream RADiUS-TWC produced movies online from early 2013. However, the financial terms of the transaction were not disclosed.
TWC is the producer of the 2012 Oscar nominated movie “The Artist”. According to a partnership signed in February this year, Netflix will stream this critically acclaimed movie along with other popular productions including the documentary “Undefeated," and French movie “The Intouchables” over the next few months. The extended partnership will allow Netflix to stream new movies such as “Bachelorette”, “Only God Forgives”, “The Details”, and “Lay the Favorite” to name a few.
Amid increasing competition from streaming providers such as HBO, Amazon.com Inc. (AMZN - Analyst Report), Hulu as well as services from cable and media companies such as Comcast Corp. (CMCSA - Analyst Report), Dish Network Corp. (DISH) and Verizon Communications (VZ - Analyst Report), Netflix remains focused on boosting its streaming portfolio with varied content. We believe that RADiUS-TWC’s fresh and diverse content will enhance Netflix’s streaming portfolio going forward.
Netflix’s library contains a wide variety of documentaries and movies that target every section of the audience. Through its original television shows, Netflix has been venturing into different genres like comedy, political thrillers, autobiographies as well as horror. Lately, 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.
Netflix continues to offer new content through partnerships with leading Hollywood studios and entertainment companies such as Metro-Goldwyn-Mayer, Twentieth Century Fox, Hasbro Studios, Warner Bros. Domestic Television Distribution, and Epix to name a few.
As a result, in the recently concluded second quarter of 2012, the total number of subscribers (Domestic and International) jumped 18% year over year to 30.1 million. We believe that the variety in content will help the company to drive customer engagement going forward.
We believe that Netflix’s improving content portfolio and international expansion are noteworthy. Despite 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, higher capital expenditures 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 who 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 becoming 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 over the short term.