Netflix, Inc. (NASDAQ:NFLX) recently made a deal with The Walt Disney Company (NYSE:DIS) to secure exclusive streaming video content for both animated and live action films, but today, analysts from Stifel Nicolaus are questioning whether that deal is enough to save the company’s business model.
As ValueWalk reported earlier this week, shares of Netflix, Inc. (NASDAQ:NFLX) jumped immediately after the deal was announced. We’ve been following this story as it’s been developing, and Netflix’ executive did say that the deal won’t increase their prices. But today, analysts from Stifel Nicolaus are joining Barclays analysts in asking about the price Netflix paid for that deal with The Walt Disney Company (NYSE:DIS).
In today’s report, Stifel Nicolaus analysts said that the deal is a key one for the video rental company, and they believe that it was a wise decision, as Netflix, Inc. (NASDAQ:NFLX) tries to rebuild its business model. They have argued in the past that the company’s subscription business model is broken because it needs either a content or location advantage. Before the deal with The Walt Disney Company (NYSE:DIS), Netflix had neither.
So analysts said that while Disney’s exclusive content will help Netflix, Inc. (NASDAQ:NFLX), at this point it’s too early to tell what effect that deal will have on the company. First of all, it will be more than three years before the agreement even starts, and we don’t know for sure how many titles will be included under that deal. If that deal had been active in 2011, there would have been 19 films, plus the direct-to-video films.
Also, the cost of the deal will weigh heavily on Netflix. There are reports that Netflix, Inc. (NASDAQ:NFLX) will pay more than $350 million per year for the deal starting in 2016. In order to make that price worthwhile for Netflix and its investors, Disney would have to bring at least 3.65 million new annual subscribers. Currently, there are about 25 million Netflix subscribers, so Stifel Nicolaus analysts feel that there is a risk to the company’s profit margins under this deal.
They are maintaining their Hold rating on shares of Netflix, Inc. (NASDAQ:NFLX) and still believe that the business model is broken. Today shares of Netflix, Inc. (NASDAQ:NFLX) are trading flat at just under $84 per share.