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Netflix (NASDAQ:NFLX)'s new strategy to buy and create its original content should bring in high returns for company. The company announced yesterday that it will release yet another original TV series called Sense8 after the huge success of their recent purchase of House of Cards, and it would be exclusively available for its subscribers on the latter part of 2014.

In a statement, Ted Sarandos, chief content officer of Netflix, Inc. said, "Andy and Lana Wachowski and Joe Straczynski are among the most imaginative writers and gifted visual storytellers of our time. Their incredible creations are favorites of Netflix, members globally and we can't wait to bring Sense8 to life."

The company currently faces strong competition on bidding for rights to stream television series and films, and pays huge amounts of fees. The online video streaming company is using data from its viewers based on the movies and television shows they frequently watch in making decisions on what type of original content it should create. Expenses for rights to shows is cutting deep into the companies pockets and this move to generate its own content should set up Netflix with a great future with less expenses allocated to buying rights and making all sorts of expensive deals for content.

Netflix's stock jumped back in the beginning of 2010 from $50 a share to almost $300 in mid-2011. The growth story was a result of the company taking the novel idea that Blockbuster came up with and making it easier and more efficient for the user by mailing it straight to the user's home. Unfortunately, at this time content became easily available online and Blockbuster went under, and similarly Netflix took a big hit. The company therefore had to restructure and everyone knew it. Investors could not cope with a once successful company reformatting and having a vague outlook for profits, and shares fell immediately upon this realization.

Netflix has returned with a vengeance, now competing with online content providers like Huluplus, Amazon (AMZN)'s Prime service and Coinstar (CSTR)'s Redbox. Unfortunately, for all three, networks, content creators and providers like Disney (DIS) began charging exorbitant amounts for its content as the company began to lose money from Cable companies who were also losing money due to the move online. It was a chain reaction, and as the bottom was getting hit so was Netflix at the top.

But Netflix was resilient; it turned around its subscriber growth and has grown it significantly in 2012 from 24 million subscribers globally to over 33 million. Further, the company has also adopted a new strategy of buying and creating its own content such as House of Cards instead of relying on outside contracts with content and service providers.

Netflix's Subscriber Growth and Decline

As I mentioned above, in Netflix's Letter to its Shareholders, dated January 23rd 2013, it has grown its subscriber base significantly in 2012 from 24 million subscribers globally to over 33 million.

Further, in the fourth quarter of 2012, Domestic streaming subscriber use has grown more then 2% and has grown internationally 1.8%. These numbers represent far greater growth than earlier quarters, with an average in the past four quarters around roughly 1% growth. This might explain the huge jump after past conference call from $100 a share to $180 a share in the matter of a the single trading day post earnings.

The DVD lender sector of the company saw a decline in the past quarter, and is assumed to continue. Yet it has slowed to only a .38% decline so it still contributes $254 million to revenue which is just above 25% of the company's total revenue. This sector which represents the past success of the company back in 2010, and now after the company's turnaround is remarkable only 25% of the company's revenue. Although analysts predict that this sector will continue to decline, the pace seems to be slowing and revenue from its now majority run online service should occlude revenue from its DVD lending service.

Content Expenses Changing

Until recently, expenses have been high and uncertain. The company's failed outlook in the past on expenses in the next quarter has caused many investors to be weary of the stock and executives at the company. Further, analysts have been under predicting the earnings per share expectation for each quarter due to varying expenses paid to service and content providers.

Fortunately, the company is lowering its reliance on other networks by creating its own original series and buying instead of renting or having other relations that take away significant cash from revenue.

Almost exactly one year ago, the company launched eight full episodes of its first original series, Lillyhammer, with Chief Content Officer Ted Sarandos promising at the time it would be "the first of many brand new, original and exclusive series to debut on Netflix." Further, a few weeks ago, with the same "binge viewing" strategy in mind, Netflix released its second original series, House of Cards.

According to a press release on February 12th 2013, Netflix original content finally seems to be picking up steam, with the announcement of its third original series to be released in December. This time around, however, Netflix is focusing on its popular kids segment with the new series, titled Turbo FAST.

Conclusion

The company has once been the epitome of a true growth story, but due to reformatting, investors have become weary and have grown skeptical of the company's executives outlook and projections. But now after all the haziness I think Netflix will regain its name as a true growth story. Although shares have had the initial jump to after last call from $100 to $180 a share, shares have recently hit resistance and I think the next conference call reassuring investors of good subscriber growth as well as adding to its pipeline of content without ties and commitments that once pulled hard on the company's revenue, will catalyze another jump in share prices.

At $180, Netflix has fair valuation with a growth projections from analysts, predicting $2.99 in 2014 and $5.54 in 2015. With growth expectations like these investors can see share prices jump to $300 in a few month, when the company confirms these projections and impresses investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Netflix's Second Growth Story