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Our previous research on Netflix (NFLX) was based on the deal struck with Virgin Media (NASDAQ:VMED), which was acquired by Liberty Global (NASDAQ:LBTYA), for installing the Netflix app on TiVo's set top box in the U.K. This will enable users to have access to Netflix content in the U.K. Netflix's long-term goal is to have around 60 million to 90 million subscribers in the coming years. Hence, the company is aggressively seeking to strike a deal with major U.S. cable providers for installing its app on set-top boxes. In the third quarter results, the company reported around 31.1 million U.S. subscribers, overtaking HBO's 29 million subscribers. We hope Netflix will manage to strike a deal with some major cable providers in the U.S., which will help it achieve its long-term goal.

A deal with U.S. cable providers can be beneficial

There has been a lot of speculation lately that Netflix is in talks with major U.S. cable providers, which are also its competitors such as Comcast (CMCSA) and Time Warner Cable (TWC) for installing its app on advanced cable set-top boxes. The two companies are still trying to figure out deal terms that will be beneficial for both the companies.

If Comcast agrees to install Netflix's app on its set-top box, this partnership will help Netflix sustain its subscriber growth. Currently, Comcast has more than 20 million pay-TV subscribers and more than 18 million broadband subscribers. Netflix is the most popular provider of on demand internet streaming services.

According to a survey, around 38% of U.S. residents use Netflix, so we assume that around 40% of Comcast subscribers already use Netflix. This leaves Netflix with a potential to target the remaining 60% Comcast subscribers. Netflix can easily target these subscribers through its original content of Emmy nominated series such as "House of Cards" and some of its top rated shows such as Arrested Development and Hemlock Grove, which have gained popularity among the viewers. If Netflix successfully acquires these subscribers and enters an agreement with a major U.S. cable provider, the company can easily achieve its long-term goal.

A deal with cable providers would help the company sustain its subscriber growth, control its content cost, which has been rising over the last few years, and improve its profitability. Over the past few years, the company has been making efforts to expand in the U.S. as well as international markets, which have led to an increase in its content cost. The content costs have skyrocketed due to high bidding by competitors and media companies over the value of their content.

A threat

A recent news article states that Comcast is now offering Time Warner Cable's operating subsidiary HBO to its subscribers on its basic TV and Internet packages in a trial offer. Comcast has launched a trial offer of "Internet Plus," expiring on Jan 31, 2014, which includes access to about ten channels and a subscription to HBO for $50 a month. Customers need a set-top box to utilize this service. Before this offer was introduced, HBO and its Internet streaming service were only available to users with a premium cable package, which costs more than $100 a month. This deal brings HBO closer to the remaining 60% of Comcast subscribers that don't use Netflix, as discussed above. The availability of HBO on Comcast points at a strong competition between HBO and Netflix to acquire the remaining Comcast subscribers. This poses a threat to Netflix as it can lose subscribers. We expect that Netflix's original content, which has been gaining popularity, will attract more viewers and help the company to acquire more subscribers.

Original content drives revenue

Netflix reported higher than expected subscribers in the U.S. as well as in the international market in its third quarter of this year. The company reported an increase of 1.3 million subscribers, making it 31.1 million subscribers in the U.S. and 1.4 million in the international market. The growth represents an increase in its original content subscription streaming service. In our previous research, we mentioned that the original content like House Of Cards, Arrested Development, and Hemlock Grove are gaining popularity among subscribers and the shows received 14 nominations. Netflix is aggressively investing in its original content. During the quarter, the company launched new seasons of The New Girl, The Walking Dead, Scandal, Breaking Bad, Revolution, and Pretty Little Liars. Also, with the success of shows, the company has ordered the second season of Hemlock Grove and fifth season of Arrested Development.

According to a survey, 45% of Netflix users watch original series such as "House of Cards." The original series are gaining popularity and we believe that over the coming quarter the percentage of original series viewers will increase, resulting in subscribers growth. Also, the company's huge investments should bring meaningful growth. The original content is distinct from other Internet streaming companies. We continue with our forecast of $7.30 billion revenue for its domestic segment for this year.

Conclusion

In the coming years, if Netflix achieves its long-term goal of having 60 million to 90 million subscribers by partnering with the major cable providers, the company is likely to observe an upside in its stock price as well as a boost to its revenue from U.S. business. We believe that Netflix's original content will take the company to a higher level and boost revenue in the coming years. Currently, Netflix is trailing at a P/E of 408.51 and a forward P/E of 81.80, which depicts that the company has a high growth potential in the future. It has an expected EPS of $3.41 for fiscal year 2014. The above fundamentals and valuation make the stock relatively attractive for 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.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Source: Why Netflix Is A Solid Buy