Netflix Adds 3 ABC Shows

ABC’s popular shows Revenge, Once Upon a Time and Scandal are now available on Netflix’s ( NFLX - Analyst Report ) streaming service. Netflix recently added Season 1 of these shows to its vast library, which already contains other ABC hits such as Grey's Anatomy, Private Practice, Desperate Housewives and Lost.

The exclusive availability of the season 1 episodes is expected to create significant buzz around the upcoming season 2. ABC is scheduled to broadcast the new episodes of the shows by the end of September. Further, the addition of these ABC hits is expected to expand Netflix’s customer base going forward.

Netflix continues to expand its vast streaming library through the addition of original series, third party productions, movies and documentaries. 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, The Weinstein Company (TWC), Warner Bros. Domestic Television Distribution, and Epix to name a few.

Through its original television shows, Netflix has been venturing into different genres like comedy, political thrillers, autobiographies as well as horror. Netflix is expected to stream five original series by 2013 end.

We believe that the improved content makes its streaming services distinguishable from other service providers such as HBO, Amazon.com Inc. ( AMZN - Analyst Report ) , Hulu as well as the 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 ) .

The improved content has also driven customer engagement lately. 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 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.