Netflix, Inc. (NASDAQ:NFLX) today announced a deal whereby it’s getting exclusive access to 300 hundred hours of exclusive content from Dreamworks Animation Skg Inc (NASDAQ:DWA). DreamWorks Animation has a rich content collection of high-budget, high-grossing films like Shrek, Kung Fu Panda 2, Madagascar, and How to Train Your Dragon. Over the past five years the total grossing value of the films ranged from $321 million to $742 million.
Neither the length of the deal nor the price of the deal was disclosed in the public announcement. Netflix will most likely disclose the amount it spent on its recent content deal when it announces earnings in the next month.
Key takeaway
Perhaps the biggest advantage to DreamWorks investors is that it provides a better monetization strategy over the long-term. The benefit of selling content to Netflix is that Netflix, Inc. (NASDAQ:NFLX) is expanding internationally, which gives DreamWorks instantaneous content redistribution, and it will market its products to consumers who may be unfamiliar to its various movie franchises. The deal is lucrative because it uses the collective buying power of Netflix’s 26.5 million paying members to pay for the redistribution of content.
Some analysts are criticizing Netflix for its almost non-existent profit margin, but the biggest benefit to this deal is that it increases the appeal of having a Netflix subscription, which may translate into higher rates of sales growth, which is a much more important metric when it comes to analyzing growth stocks.
Analysts anticipate Netflix, Inc. (NASDAQ:NFLX) to grow revenues by 20.10% in the current fiscal year; however we have no way of knowing how accurate these predictions are. This is because Netflix’s upper-management is only willing to provide guidance up to a quarter out.
Let’s not forget that Netflix has been able to beat analyst estimates by 117.87% on average over the past four quarters. The company’s recent launch of original content series and its purchase of high quality content from Time Warner Inc (NYSE:TWX), The Walt Disney Company (NYSE:DIS), and DreamWorks are putting it well ahead of its competitors. Eventually, we will enjoy original classics like Family Guy, Iron Man 3, Shrek, all for $8/month.
Netflix is trying to grow out its international streaming business, and that’s probably the reason why Disney jumped ship from Hulu in favor of Netflix, Inc. (NASDAQ:NFLX). After all Netflix’s international distribution continues to gain greater economies of scale.The Procter & Gamble Company (NYSE:PG) projects that between 2010 and 2020 the middle class will increase by 1.4 billion people, and 98% of that will come from the emerging markets alone. Internationally, I predict that the number of Internet users will increase to approximately 5 billion people by 2020. This implies that Netflix’s growth story is nowhere near over and that the company is extremely far away from market saturation.
Investment metrics
Netflix remains a lucrative investment opportunity despite all the negativity surrounding the extremely high earnings multiple. The earnings multiple is 548.6, which is high, but, on the other hand, the company is projected to grow earnings at an absurd rate over the next two years. Analysts anticipate Netflix to grow earnings by 386% in fiscal year 2013, and to follow that with 121.3% growth in 2014.
Part of this is driven by greater economies of scale, which improves the contribution margin (the marginal profit per unit sale). The other factor is cost cutting measures. Those two combined will increase the total amount of net income. Even if the company were to fail at generating substantial net income growth, long-term investors would buy the stock based on the tremendous revenue growth potential.
Walt Disney a lucrative investment opportunity
Netflix, Inc. (NASDAQ:NFLX) is the most likely of the tech companies to expand into emerging markets — something Walt Disney needs a market presence in. While Mickey Mouse is a common household icon in the United States, that’s not always the case in emerging markets like Brazil, Russia, India, and China. The $8 price point is an equalizer that can work in literally any market economy that has a high number of Internet users.
Because Walt Disney wants to open more of its Disneyland theme parks, the company needs to ensure that the local demographic has an understanding of the various Walt Disney characters — otherwise what will draw people to see Tigger and Winnie the Pooh? Walt Disney’s Parks and Resorts segment is its second largest segment and its fastest growing segment according to its most recent earnings release. Parks and Resorts generated $3.3 billion in revenue for the second quarter and had an operating profit of $383 million. The operating profit from its Disney Park and Resort segment grew by 73% year-over-year.
Analysts on a consensus basis anticipate Disney to grow earnings by 12.37% on average over the next five years. This is likely to be sustained based on the growth in its Parks and Resorts segment. The company compensates investors with a 1.18% dividend yield and remains a compelling investment over the long-term.
DreamWorks Animation will grow exponentially
The exact dollar figure that Netflix would pay to DreamWorks Animation isn’t exactly clear. However, from what I see on DreamWorks Animation’s income statement, the company reported a year-over-year decline in earnings of around $4 million for the first quarter. Assuming Netflix pays out more than $12 million per year for the content (which I am sure it will), the net benefit to DreamWorks Animation is that it will immediately boost the amount of profit it generates from movie development. The added revenue stream is an extra source of revenue that comes without any added costs, which is why investors bid the stock up by 4.08% on the Monday trading session.
Analysts on a consensus basis anticipate the company to grow its earnings by 295.3% for the 2013 fiscal year, which could be boosted even further with its recent content deal with Netflix. The company doesn’t pay out a dividend, which is a bummer for those who invest for income. On the other hand, growth investors who are solely focused on momentum should consider an investment position in the stock.
Conclusion
Netflix, Inc. (NASDAQ:NFLX) wins another round of content deals against Amazon.com, Inc. (NASDAQ:AMZN). While it is true that Amazon got a deal with Viacom, Inc. (NASDAQ:VIAB), it pales in comparison to Netflix’s string of deals, which include Walt Disney, Time Warner, and DreamWorks Animation.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends DreamWorks Animation, Netflix, and Walt Disney. The Motley Fool owns shares of Netflix and Walt Disney.
The article What Is Netflix’s Market Saturation Point? originally appeared on Fool.com.
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