Netflix Boosts Portfolio

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Netflix Inc. (NFLX) has entered into a multi-year licensing agreement with Warner Bros. Domestic Television Distribution, a division of Time Warner Inc. (TWX). Pursuant to the agreement, Netflix gained the right to stream prior episodes of Pretty Little Liars and The Lying Game. Both the shows are a part of the ABC Family TV series. Netflix’s portfolio already comprises other popular ABC titles such as The Secret Life of the American Teenager, Make It or Break It, and Melissa & Joey.

Pretty Little Liars and The Lying Game are both teen series with a huge fan following across the U.S. Notably, the first season of the Pretty Little Liars is readily available on Netflix, while the second season will be available for streaming starting July 3. Moreover, the first season of The Lying Game will be available for streaming from early 2013.

Separately, Netflix enhanced its movie portfolio and together with cable provider Epix, Netflix will stream blockbuster titles such as Thor, Transformers: Dark of the Moon and Captain America: The First Avenger starting July. Another agreement with Relativity Media ensures the addition of Immortals to its portfolio, which will also be available in July.

Netflix has been adding content to compensate for the loss of old licensing deals like the one with Starz, which ended in February this year. We believe that content additions will not only improve Netflix’s competitive edge in domestic and international markets, but will also boost subscriber growth going forward. In the recently concluded quarter, the total number of subscribers (Domestic and International) was 29.1 million, an increase of 23.3% from the comparable prior-year quarter.

Netflix’s future growth strategy is entirely based on the online streaming business, as its DVD rental business continues to witness subscriber losses. Moreover, we believe that increasing costs related to licensing and renewal fees and higher capital expenditure due to international expansion can hurt earnings in the near term.

We believe that the streaming market is getting overcrowded with bellwethers like Amazon.com Inc. (AMZN) and Verizon Communications Inc. (VZ), and is likely to hurt Netflix’s margins going forward.

We have a Neutral recommendation on Netflix over the long term. Currently, Netflix has a Zacks #3 Rank, which implies a Hold rating in the short term.

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