Another Original Series on Netflix - Analyst Blog

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According to recent news from Bloomberg, Netflix Inc. ( NFLX ) is on the brink of producing another original series called Orange Is the New Black . Based on a communications executive's autobiography, it has been rumored that Netflix will produce 13 episodes of this new comedy series.

Netflix grabbed the rights of the original series from Jenji Leslie Kohan, a television writer, producer and director, well known for her comedy drama Weeds . If the deal materializes, Orange Is the New Black will be the second original series produced by Netflix, following the Kevin Spacey-starred original political drama House of Cards in 2011. Netflix is expected to stream five original series within the first half of 2013.

We believe that Netflix will continue to focus on producing original content in order to differentiate its service from its closest rivals HBO, a division of Time Warner Inc. ( TWX ) and Amazon Inc. ( AMZN ) .

Netflix is also picking up exclusive distribution rights to third party productions, such as E Street Band guitarist Steven Van Zandt starred - Lilyhammer (premiered on February 6). The company is also reviving Fox's canceled series Arrested Development , which is expected to be streamed in the first half of 2013. According to Bloomberg, Netflix is also in talks to secure the rights to the horror drama Hemlock Grove , a series produced by Gaumont International Television.

We believe that the new content additions will not only enhance Netflix's competitive edge but will also revive its dwindling subscriber growth going forward. Apart from refreshed content, Netflix continues to sign a number of licensing deals with big Hollywood production houses to provide varied content, which is expected to further attract new customers going forward.

Netflix raised $400 million in cash through stock offerings at $70 per share and convertible bonds in late 2011, 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, we believe that higher capital expenditure due to international expansion will hurt earnings growth in the near term. Moreover, increasing competition from Amazon, HBO and entry of Verizon Communications ( VZ ) into the streaming market will limit the company's upside going forward.

Thus, 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.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: AMZN , NFLX , TWX , VZ

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