Netflix Surges on DreamWorks Deal

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Netflix (NFLX) has entered into a multi-year deal with DreamWorks Animation SKG, Inc. (DWA), enabling it to stream over 300 hours of new programs based on characters from the latter’s portfolio of popular films. Netflix will air these shows in 40 countries from 2014.

Buoyed by this news, Netflix’s shares jumped 7% yesterday, continuing its dream run over the last couple of months. In the last six months, shares of Netflix have risen an astounding 139.7%.

The current deal comes at an opportune moment for Netflix as Amazon (AMZN) has significantly increased its attempt to garner new shows through licensing deals with Viacom (VIAB) and other production houses. It is worth noting that Netflix’s streaming deal with Viacom expired at the end of May 2013.

In February, Netflix announced that it would stream an original series, Turbo: F.A.S.T. (Fast Action Stunt Team), exclusively for kids in collaboration with DreamWorks. This original series will be available for streaming from December in the U.S. and abroad.

Video streaming companies have recognized that kids make up a significant chunk of TV show and film viewers. To capitalize on this opportunity, Netflix launched its exclusive Internet video streaming service for kids, ‘Just for Kids,’ in 2011.

On the other hand, Amazon has also been expanding its video library with shows meant for kids. It has recently decided to produce five original TV series, including three children’s shows.

Netflix’s growing offerings in the original program series is expected to diversify its online content and help it stand out from other streaming content providers. We believe that these initiatives will be incrementally beneficial for the company, helping it to add new subscribers and retain the older ones, going forward.

This is indicative of the fact that in the last-reported quarter, Netflix added 2.03 million streaming subscribers in the domestic market and 1.02 million subscribers in the international market.

However, higher costs owing to international ventures and licensing fees and continued subscriber losses in its DVD business are near-term headwinds. Loss from the international business, due to higher content and marketing costs, is another concern in the short term.

Nonetheless, we believe that new streaming content deals and its original content portfolio should be able to entice new subscribers both in the U.S. and International markets.

Currently, Netflix has a Zacks Rank #3 (Hold).

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