- Netflix shares have clocked strong gains over the past one week after the company announced new content deals.
- This demonstrates that the market has a good grasp of the importance of good content for the video streaming giant.
- Netflix shares might suffer in early 2016 due to the company going through the fourth quarter without original content.
- Netflix shares, however, remain good long-term investments.
Shares of streaming video services provider Netflix (NASDAQ:NFLX) are up more than 8% over the last five days after the company announced two new content deals about a week ago. The shares had at one point made gains over 10% in a space of just three days but the rally appears to be cooling off. Netflix shares are now up an amazing 120% YTD in what has shaped up to be one of the most rewarding periods for Netflix shareholders.
Netflix Stock 5-Day Returns
Source: CNN Money
Netflix announced on September 28 that it had licensed subscription video on-demand (SVOD) global streaming rights to COLONY’s upcoming shows Ryan Condal ("Hercules") and Carlton Cuse ("Lost") from Universal Cable Productions and Legendary Television. The shows will premier in the U.S. on January 14, 2016. Meanwhile, Netflix made another announcement on the same date that it had acquired SVOD rights for Jane the Virgin and Zoo for 50 countries around the world from CBS (NYSE:CBS). Zoo is already available in the U.S. while Jane the Virgin will premiere on Oct. 12.
Content Unease At Netflix
The fact that Netflix shares have reacted so strongly to the new content deals goes to buttress my thesis about Netflix impending content woes and the potential impact on the stock, following the loss of the Epix deal. In the second article, I expressed my concern over Netflix’s 5-year original content deal with Epix that was set to expire in September. I explained that Netflix had decided not to renew its deal with Epix because Epix had cross-licensed content to Netflix’s chief rival, Amazon Prime Video.
In the first article, I discussed how cable TV companies that have traditionally supplied content to Netflix were beginning to sour on the company and instead preferred to license content to smaller rival Hulu. Hulu is co-owned by Walt Disney (NYSE:DIS), Twenty-First Century Fox (NASDAQ:FOX) and NBC Universal, so the cable companies could simply be looking after their interests. Hulu has about 9 million subscribers, compared to Netflix’s 40 million, but is rapidly gaining popularity in many households. It’s interesting to note that Epix will license a good deal of content that was formerly available on Netflix to Hulu, which might provide a small but real incentive for some subscribers to switch to the smaller company. The cable companies have been licensing more content to Hulu because they claim it offers better compensation than Netflix does.
The strong movement by Netflix shares aptly demonstrates that the market fully understands the importance of good content to Netflix. I pointed out in the article that the effects of loss of Epix deal would most likely be felt during the first quarter of the coming fiscal year. The fourth quarter has traditionally been Netflix’s strongest since most subscribers tend to join its ranks during the hot holiday season. But with no original content to act as bait to lure new customers to sign up, subscriber growth might not be as strong as anticipated. This will of course become apparent when Netflix announces its results during the first quarter of the coming fiscal year. Netflix shares tend to make their strongest gain after the company announces fourth quarter results for the previous year due to impressive subscriber growth. The fact that Netflix will go through a dry patch lasting at least a few months with no original content does not bode well for the short-term outlook for Netflix shares. I would therefore like to reiterate my call to take some profits heading into the first quarter.
Netflix Shares Still A Good Long-Term Opportunity
But the long-term opportunity for Netflix remains as good as ever. About two-thirds of Netflix subscribers are in the U.S. Compare that with the average global Internet company in the U.S. which derive 65%-80% of its revenue outside the country. Netflix therefore has plenty of room to run before it can saturate international markets. Meanwhile, Hulu, the company that is now emerging as Netflix’s bitter rival, has said that it does not have any international expansion plans for now. That should give Netflix ample room to get a proper foothold in these markets.