Netflix goes all in on content with DreamWorks

Their new deal for original programming could be a win for both, but does that make their stocks a good buy now?

By Jonathan Berr Jun 19, 2013 9:33AM
For a company that many had given up for dead after some serious customer service snafus, Netflix (NFLX) sure has rebounded. Its stock has surged more than 145% this year. It could move even higher as investors bet that the streaming video company's investments in original content with DreamWorks (DWA) and others pay off. Or Netflix could buckle under the increasing costs it's paying to content producers.

Arguments can be made for either scenario.

In Netflix's favor, the number of cord-cutters, people who quit pay-TV services, is on the rise. Between 2008 and 2012, Convergence Consulting Group estimates that 3.74 million people said goodbye to their cable or satellite company. That figure may hit 4.7 million this year, accounting for 1.1% of pay-TV accounts.

On the other hand, Netflix's deals to secure original programming generate a lot costs that will need to be recouped before those deals are profitable. But its phenomenal growth is undeniable. During the last quarter, Netflix had 29.2 million streaming video subscribers in the U.S. and 7.1 million internationally, versus 5.8 million and 4.1 million, respectively, a year ago. Revenue rose 18% to $1.02 billion.    

Netflix login screen; DreamWorks Animation sign at DreamWorks Studios in Redwood City, Calif. (© Mike Blake/Newscom/Reuters; Paul Sakuma/AP Photo)DreamWorks' partnership with Netflix is certainly good news for the studio. It will provide 300 hours of original content and will develop new shows for Netflix based on fan favorites such as "Shrek" and "Kung Fu Panda." Terms of the deal weren’t disclosed, but it probably carries a steep price tag for Netflix.

With a price-to-earnings multiple topping 330, Netflix is way too expensive to recommend. DreamWorks, however, is another story. The studio founded by record mogul David Geffen, filmmaker Steven Spielberg and media executive Jeffrey Katzenberg trades at a more reasonable valuation of 28.8 on an estimated basis for 2013.

However, both stocks are trading ahead of their 52-week price targets, so there's no rush to buy either one. By contrast, cable-TV giant Comcast (CMCSA) -- even with the threat of cord-cutters -- could be a better buy than either Netflix or DreamWorks. It has an attractive multiple of 17.13. Analysts' 52-week price target is $47.59, about 17% higher than where it currently trades. And, best of all, Comcast pays a dividend while Netflix and DreamWorks don't.

Although Netflix may represent the future of entertainment -- and a long-term bet for investors so inclined -- Comcast is still very much a player. The Philadelphia-based company is the best stock of this bunch for investors to buy today.

Got any comments on this episode or suggestions for future ones? Submit them in the comments section.

Jonathan Berr does not own shares of the listed stocks.  Follow him on Twitter@jdberr

Jun 19, 2013 12:41PM
If Netflix does not improve the streaming service movie selection they will kill themselves off is the bottom line.
Jun 19, 2013 11:17AM
Netflix finds itself in a hard position. In order to create value for its customers it needs to keep getting new quality shows and movies. Content holders (usually not the same as content producers) charge outrageous prices for Netflix to have access to their content. This means that either Netflix has to pay large amounts of money to secure relatively little content or continue to add "poor quality" movies and shows that no one wants. I hope Netflix has a future but the only way they can grow it is add high quality material every month to prevent people from joining then cancelling after they watch what they want.
Jun 19, 2013 12:50PM
The inconsistency of their offerings as well as slow delivery of new content make me hesitant to subscribe again. 
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