Marriage is always sweet, and the marriage of Dreamworks Animation Skg Inc (NASDAQ:DWA) and Netflix, Inc. (NASDAQ:NFLX) could make those investments even sweeter. On Monday, these companies announced an agreement to stream over 300 hours of original content on Netflix that Dreamworks will make.
For Netflix, Inc. (NASDAQ:NFLX), Dreamworks Animation Skg Inc (NASDAQ:DWA) will make a series based on its upcoming movie Turbo. Turbo is an animated kids movie about a failing family restaurant that can’t seem to get any business. That family ends up finding this snail that can race as fast as a car and enters the snail into a NASCAR race to help save their restaurant. That movie will be made into a TV series called Turbo: F.A.S.T. Other content will be made as well, with a speculated Shrek series, which could be huge.
For the children
Netflix, Inc. (NASDAQ:NFLX) has two different options for viewers when you start it up; you can watch either the normal service, or the “just for kids” one. The kids service is there so that parents can feel safe knowing that their kids aren’t watch R-rated movies and so Netflix can easily showcase all of its cartoons and shows for a children’s audience.
In May, the streaming deal between Netflix, Inc. (NASDAQ:NFLX) and Viacom expired and wasn’t renewed. Viacom owns Nickelodeon, which makes shows such as SpongeBob SquarePants and Fairly Odd Parents. These are very popular kids shows, and families were angered that they weren’t there anymore.
The streaming deal between Dreamworks Animation Skg Inc (NASDAQ:DWA) and Netflix can help remove those kind of situations, as the content Dreamworks makes for Netflix, Inc. (NASDAQ:NFLX) is exclusive for Netflix and will most likely be there for a very long time. This will reduce subscriber churn and lower the amount of subscribers leaving Netflix because their favorite show isn’t on it anymore. That creates a far more stable revenue and profit stream for Netflix, which will be very big for its stock price.
The content makers
Dreamworks Animation Skg Inc (NASDAQ:DWA) also benefits because it will have more leverage over the control of its TV content. If it receives a deal that it views as too low, it can always turn to Netflix, Inc. (NASDAQ:NFLX). So far, Netflix has said it wants to spend 10% of its content acquisition costs on original content, which right now is $200 million ($2 billion total content costs).
As Netflix buys up more content and content costs up go, that $200 million will grow. Plus, if the original content works out and draws in more subscribers (like House of Cards and Arrested Development did), then Netflix could increase the 10% threshold up to 15% or 20%. Dreamworks Animation Skg Inc (NASDAQ:DWA) will be able to take a large share of that cash, especially if it makes a Shrek TV series, which would be huge on Netflix, Inc. (NASDAQ:NFLX).
Viacom isn’t going to miss out on the streaming binge watching craze either. The company signed a deal with Amazon.com, Inc. (NASDAQ:AMZN) to stream tons of its children’s shows on Amazon Prime, from SpongeBob SquarePants to Blues Clues. This is good news for Amazon’s Prime service, as it allows the company to show the world that it is a true competitor to Netflix. It also is good news for Viacom, because it allows the company to keep making money off of the content that it has already made.
Margins from streaming
Netflix, Inc. (NASDAQ:NFLX) has quite a high PE (trailing-12 months) of 516, which puts it valuation up there next to the social-networking companies. But its forward PE is 70, as EPS is expected to grow by 121% over the next year. If Netflix can meet those targets, then its high valuation will seem more reasonable. It looks especially realistic when you look at Netflix’s increasing margins and shrinking negative margin for overseas subscribers.
Trefis sees Netflix, Inc. (NASDAQ:NFLX)’s streaming margin in the US rising to 30% by 2019, which is a significant improvement from 19% today. This as marketing costs as a percentage of revenue decline and more subscribers sign on. I wouldn’t be a major buyer as of right now, but taking a speculative position in Netflix could be a great long-term play as it becomes far more profitable over the next two years.
Dream of this working
Dreamworks Animation Skg Inc (NASDAQ:DWA) used to just make movies, which made its profit stream very volatile as it only made money when movies were released and for a period of time after that. If Dreamworks can start making more TV shows, which it already has for Cartoon Network and is going to do for Netflix, Inc. (NASDAQ:NFLX), then it can increase its profits and smooth them out. The less volatile the profit stream the happier the investor.
Keep in mind that Dreamworks Animation Skg Inc (NASDAQ:DWA)’ revenue is $748.5 million (trailing-12 months), so if it can grab a large chunk of Netflix’s original content spending then it can boost its revenue by 7% to 12%. I’m bullish on the Netflix-Dreamworks deal and would also recommend a speculative position in this stock for the next few years.