Streaming video giant Netflix (NASDAQ:NFLX) has just added some more big-name cartoons to its archives via a recent deal with Time Warner (NYSE:TWX). This comes after a previous announcement that NFLX would get dramas including critically acclaimed The West Wing, among others.
On the heels of a recent agreement with Disney (NYSE:DIS) to get some much-coveted children’s programming from the Mouse House, this could signal Netflix is doing well at defending its turf in the war for quality programming.
The only question for investors, then, is whether it’s enough to keep domestic subscribers satisfied despite the rise of many competitors … and whether international growth will start delivering a good return on the big NFLX investment anytime soon.
First, the latest news: Warner Brothers Television and Turner Broadcasting — both subsidiaries of Time Warner — agreed to give Netflix the rights to some big cartoon franchises. These include animated Green Lantern episodes, but there are also some raunchier adult toons via Cartoon Network’s late-night Adult Swim programming, including cult hits Aqua Teen Hunger Force, The Boondocks and Robot Chicken. The deal starts March 30 and also includes a remake of Dallas, which will be an exclusive Netflix series in 2014.
The move comes on the heels of a big long-term Disney deal a month ago that includes classics like Dumbo and Alice in Wonderland, with theatrical releases starting as part of the Netflix catalog in 2016.
The good news for investors is that Netflix is serious about content, and these contracts likely weren’t cheap. It’s also a bit of a coup that NFLX managed to partner up with Time Warner — considering TWX offers on-demand video via its cable service and also offers online streaming to its internet customers. In many ways, Time Warner and Comcast (NASDAQ:CMCSA) are becoming Netflix competitors in streaming and such an alliance is encouraging.
However, there remain serious concerns for Netflix that content deals alone can’t fix:
- Original Programming: NFLX still is gambling hundreds of millions on original programming, and we have yet to see whether or not that will bear fruit.
- International Growth: Netflix is plowing money into expanding overseas, but profits remain elusive. International streaming operations posted a net loss of about $100 million in 2011 … but are posting losses of almost $100 million a quarter in 2012. Yes, Netflix is adding about 500,000 users or so a quarter around the globe, but you have to wonder when (or if) it will reach the scale to move into the black.
- Nosebleed P/E: Netflix was barely breakeven in 2012, and analysts projected a mere 49 cents in earnings for fiscal 2013, according to Standard & Poor’s estimates — giving NFLX stock a forward P/E of more than 200! So even if growth does happen, it’s fair to say a lot of growth has already been priced in.
Anecdotally, I am a Netflix subscriber because of the children’s programming. I actually do not have cable at all and simply use NFLX to parent my children for a few hours on the weekend. Many friends do, too — and this leads me to believe that Netflix has a pretty loyal base of parents to depend on.
But as for growth, I remain skeptical based on personal experience. The shows are typically stale — and while my wife and I love laughing and Rob and Laura in The Dick Van Dyke Show, the vast majority of people I know feel like there’s nothing new or interesting to watch, and that they have plenty of streaming alternatives, including Amazon (NASDAQ:AMZN) and its Prime service or Hulu or even TV episodes in Apple‘s (NASDAQ:AAPL) iTunes Store.
We’ll see if this recent Time Warner deal can help bolster the programming catalog enough to keep subscribers happy and fuel future growth. But as an investor as well as a Netflix user, I remain pretty skeptical.
- Read about the first round of TWX programming here and the Disney details here. (InvestorPlace)
- Of course, I panned NFLX in December and the stock has gone up by double digits. (MarketWatch)
- One of Netflix’s original programming gambits is a remake of the sitcom Arrested Development … seven years after it was cancelled. (USA TODAY)
- Oh yeah, it still mails DVDs too. Except the courts are mad the USPS gave Netflix preferential treatment. (Fox Business)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in AAPL.