Netflix, Inc. (NFLX) Is Poised to Outperform

Netflix, Inc. (NASDAQ:NFLX) is adding a lot of shows geared towards children and is also producing a show with DreamWorks called Turbo: Fast, which is a continuation of the launch by DreamWorks for Turbo anime on July 2013. The company’s ambitions to turn into a full-fledged Internet TV Network can be gauged by the different types of shows for various types of viewers.

Netflix struck the biggest deal in its operating history to build a large number of original programming shows based on characters of DreamWorks. This is a great move for DreamWorks, enabling it to have more predictable revenue, unlike the theatrical movie business which has volatile and unpredictable revenues.

If Netflix can build highly successful shows like Time Warner’s HBO, it can see sizable increases in its subscriber base. HBO’s Game of Thrones had an average audience of 13.6 million per episode in this season, which is only behind the other hugely successful HBO show, The Sopranos, which had 14.4 viewers in 2004. On the other side, AMC Networks has a number of hit and critically acclaimed shows like Mad Men, Breaking Bad, The Waking Dead etc.

Netflix is licensing these shows from AMC, but if Netflix can develop shows like AMC and build its own franchises, the company’s subscriber base should see sizable increases. Netflix’s well-spaced original shows of one or two per quarter can drive subscriber numbers throughout the rest of 2013 not only in the U.S., but in International territories as well.

Source: Estimates, Company Data, IMDB

Content costs are manageable; Moody’s happy with credit position

Netflix added just slightly less than $600 million in streaming content in 1Q, which is below the average for 2012 when the company added content at a pace of $628 million per quarter. Netflix will expand its original content slate as it gets more insight and confidence.

Netflix bears tend to point that the company’s content costs are getting out of hand. However, that is not the case. Netflix had long-term and short-term commitments and liabilities of $5.7 billion (including off-balance sheet liabilities of $3.3 billion) at the end of 1Q13, which was a modest increase of only $100 million. The company has around $1 billion in cash, and $500 million in long-term debt, and its current ratio is above 1.5 as well.

The company even converted $200 million worth of convertible debt into 2.3 million shares, which also enhanced its Debt/Equity Ratio. Credit rating agency Moody’s says Netflix’s conversion of its convertible notes is credit positive, and the company is on track to be well positioned at the Ba3 rating due to its improved profitability and growth in subscribers. The argument of Netflix bears is clearly flawed.

The bottom line

At the end of 1Q13, the number of broadband subscribers in the U.S. stood at 82.4 million, according to Leichtman Research Group. As a result, Netflix, Inc. (NASDAQ:NFLX)’s market penetration rate in the U.S. stands at roughly 35% of broadband households. Thus, the company’s addressable market in the U.S. still has sizable room for growth from current levels of only 29.17 million subscribers.

In 2011, it had a solid net income of $226.1 million and the company ended 2011 with 23.5 million subs. And fast forward to 2013, the company ended last quarter with more than 36.3 million subscribers. It is very evident that with a much larger sub base, and one that is actively growing globally, the company can deliver much higher bottom line numbers in the future. The company’s addition of original shows will build up a loyal fan base among its subscribers, and limit its churn rate to record low levels as well.

The article Netflix Is Poised to Outperform originally appeared on Fool.com.

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