) popped over 7% after the company announced a new partnership with
Under the multi-year agreement, Netflix's largest-ever content
deal, the company will receive over 300 hours of new and original
DreamWorks programming, chiefly animated children's TV series
featuring characters from DreamWorks movie franchises such as
Kung Fu Panda
DreamWorks Animation could soon start producing cartoons for
Netflix based on characters from
Kung Fu Panda
This agreement is part of Netflix's new strategy of growing its
library of original content to enhance its unique selling
proposition, "to become
) faster than HBO can become us," as Netflix chief content officer
Ted Sarandos once famously quipped.
Earlier in the year, Netflix launched high-profile original series
House of Cards
, both of which appear to have provided a nice boost to the
company's streaming traffic, though Netflix has yet to offer any
internal viewership figures.
And with the new DreamWorks animation deal, investors seem to be
happy with Netflix's expansion into original children's
programming, which explains the stock's rise on Monday, the day the
deal was announced.
"So, here's the burning question for families with children: Would
you rather park the kids in front of Nickelodeon, or just hand over
your Netflix login information, given that the
average cable television subscription
costs about $70 per month, and a Netflix subscription costs $7.99 a
month?" wrote Minyanville's Carol Kopp, surmising what is probably
of many Netflix stock holders.
Is Netflix, Inc the Next HBO? DreamWorks Animation Skg
Inc Deal Hits Big Cable Where It Hurts
But while Netflix is riding high (its stock has risen an
eye-popping 148% in 2013), not all Wall Street analysts are bullish
about its future prospects.
Of the 36 Wall Street analysts who cover Netflix, 10 have Buy
ratings on the stock, while nine have Sell or Underweight ratings
and 17 have Hold ratings. The average price target of all 26
analysts is $192.78
One analyst who's still less than sanguine about the stock's
prospects is Wedbush Securities' Michael Pachter.
"Under prior deals, Netflix does not own the rights to the
underlying content, but instead agrees to fund a portion of the
development costs in exchange for the rights to exhibit the content
on an exclusive basis for a limited period of time," he wrote in a
client note, adding that "Netflix's rights extend to the premiere
of each show, but may not extend for many years beyond."
"We continue to believe that Netflix's original content deals are
costly, and although we believe that they will serve to add
subscribers for the company, it is not clear to us that original
programming will have a lasting benefit," continued Pachter, who
has an Underperform rating on Netflix, with a $65 price target.
Is the Netflix Stock Boom a House of Cards?
Of course, the big worry for Netflix bears is the company's
ever-rising content costs, which prevents profitability from
improving even if Netflix is growing its subscriber base
In April, after Netflix released its first-quarter earnings
results, Pachter also commented on the issue on
"I think that all investors have to do is look at the last page of
their investor letter, and you can see that revenue sequentially
went up $49 million and content cost went up sequentially $16
million. That is unsustainable," he said.
"If I can notice that in the first half hour after the call, I
think every content owner can see that. Netflix is not paying
enough of revenue to content owners. They're profiting by paying
less for content. That's not sustainable," added Pachter.
Indeed, original content is not cheap to produce (no financial
details were disclosed for the DreamWorks deal, but it has been
estimated that the two seasons of
House of Cards
, for example, will cost $100 million).
And with big media players like
) iTunes all bidding for programming from content producers,
Netflix will find it hard to keep content acquisition costs down as
But, of course, some analysts say the threat of competitors like
Amazon is overhyped.
"I've been a skeptic, and the biggest argument against Netflix was
that competition was going to crush them," said Josh Brown of
Fusion Analytics, according to CNBC. "I'm now listening to that for
12 years. It hasn't happened."
"Everyone's about to kill Netflix," he said, noting then Amazon,
Time Warner Cable
(CMCSA) have all at one time or another be cited as likely Netflix
killers. "Let me know when it happens. In the meantime, [Netflix
is] controlling the story."
Additionally, bulls also say that as Netflix grows larger and gains
greater power at the bargaining table, it will be able to better
control content costs.
"If Netflix is able to gain footage into the next 30% of
households, not only will it position itself to better negotiate
future licensing deals on content to lower operating costs, Netflix
will be in a position to substantially threaten current cable
providers such as Comcast and Time Warner, in becoming a serious
Indeed, Jefferies analyst Brian Fitzgerald argued the power shift
has already begun.
"Netflix is starting to get to a degree where content companies are
considering them a viable distribution partner" for new programs,
said Fitzgerald, according to
. Studios are "coming to Netflix for deals instead of vice versa,"
he pointed out.