Shares of
Netflix Inc. (
NFLX
)
surged 13.4% to close at $81.72 on July 5, 2012, after Chief
Executive Officer ("CEO") Mr. Reed Hastings recently announced that
subscribers watched 1 billion hours of television shows and movies
in the month of June.
In his blog post on social networking site
Facebook (
FB
)
, Mr. Hastings shared his optimism on the upcoming releases of
House of Cards
and
Arrested Development
, which are believed to drive further viewership.
Netflix is expected to stream
House of Cards
, starring Kevin Spacey, later this year. The company plans to air
10 new episodes of
Arrested Development
in early 2013. This show will also be available to United Kingdom
and Ireland subscribers.
The recent surge in viewership has been primarily driven by
Netflix's engaging content, in our view. 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, Epix to name a few.
Apart from
House of Cards
and
Arrested Development
, Netflix has also acquired the rights of another couple of
original series, namely
Orange
Is the New Black and
Gaumont International Television production
Hemlock Grove
. 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 as HBO,
Amazon.com Inc. (
AMZN
)
, Hulu as well as the newly launched services from cable and media
companies such as
Comcast Corp. (
CMCSA
)
,
Dish Network Corp. (
DISH
)
and
Verizon Communications (
VZ
)
.
Netflix's library not only contains varied types of
documentaries and movies but also original television shows of
different genres. This is reflected from the fact that
House of Cards
is a political thriller;
Arrested Development
is a comedy,
Orange Is the New Black
an autobiography, while
Hemlock Grove
is Netflix's first venture into original horror series.
We believe that this variety in content will help the company to
further boost customer engagement going forward. At the end of
2011, Netflix was among the worst performers with respect to
customer satisfaction among the largest online retailers. This was
a significant drop considering the fact that the company was the
joint leader in 2010 holiday season and has been one of the
top-performers historically.
Recently, Netflix said that it is considering a plan to redesign
its website that will separate movie viewing options from its
growing television catalog, in order to make it easier for
subscribers to find programs of their choice going forward.
However, the company is yet to confirm the redesign.
Our Take
We believe that Netflix will continue to pursue different
avenues and ventures in order to expand its online subscriber base
going forward. Netflix's future growth strategy is entirely based
on the online streaming business, as its DVD rental business
continues to witness subscriber losses.
We believe that Netflix's improving content portfolio and
international expansion are noteworthy. Despite 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, unless that happens we prefer to remain on the
sidelines. We also believe that higher capital expenditure due to
international expansion will hurt earnings growth in the near term.
We are Neutral on the stock over the long term (6-12 months).
Currently, Netflix has a Zacks #3 Rank, which implies a Hold
rating over the short term.
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