Does This Deal Guarantee Netflix’s Future Profitability?

After Netflix (NASDAQ:NFLX) lost its exclusive Epix rights to Amazon (NASDAQ:AMZN) in early September, analysts worried that the company had lost its competitive advantage. However, Netflix still has clout in the industry. On Tuesday, Walt Disney (NYSE:DIS) announced a multi-year licensing agreement that will make Netflix the only U.S. subscription-based streaming video service to provide its live-action and animated films to customers.

Here are the Particulars of Netflix’s Disney Deal

For three years, beginning in 2016, Netflix will be able to provide its customers with all of Disney’s theatrically released films, including animated projects from Pixar and superhero movies from Marvel. Netflix will also have non-exclusive streaming rights to its older library titles like  “Dumbo,” “Pocahontas” and “Alice in Wonderland.” More importantly, this deal will significantly increase Netflix’s catalog of recent releases; currently, only films from independent studios are available for subscribers.

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Securing the rights to new Disney pictures fulfills one of Chief Executive Reed Hastings’s goals for the company. He has long said that he “wanted to get pay-TV rights to films from one of Hollywood’s six major studios to boost their company’s online entertainment service,” according to the L.A. Times. The deal will also distance Netflix from its competitors; previously Liberty Media’s (NASDAQ:LMCA) pay channel Starz had the rights to all of Disney’s movies, but the two companies could not agree on renewal terms.

While neither company has confirmed how much the deal will cost Netflix, the L.A. Times reported that it could run as much as $300 million per year.

CHEAT SHEET Analysis: Is This Acquisition a Positive Catalyst for Netflix’s Stock?

One of the core components of our CHEAT SHEET Investing Framework focuses on catalysts that will move a company’s stock. Mergers and acquisitions or joint ventures are always events investors should watch closely. How much money is being spent? How quickly will shareholders recognize a return on investment?

Even though Netflix has courted concerns from a variety of analysts that its content costs will soon outpace its revenue growth, Netflix’s business depends on acquiring high-quality content. As CNET reports, the Disney deal will help distance Netflix’s service from that of Amazon and will give “instant credibility to Netflix’s claims that the company is a competitor to the bigger cable players.” Furthermore, acquiring popular and current content will help the company build revenue as its DVD-by-mail service declines. The deal, which indicates to investors that the company will continue to be profitable in the near future, sent shares up 15 percent in regular trading on Tuesday.

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