The Netflix sign on is shown on an iPad in Encinitas, California, April 19,2013. REUTERS/Mike Blake/File Photo

The Netflix sign on is shown on an iPad in Encinitas, California, April 19,2013. REUTERS/Mike Blake/File Photo (Copyright Reuters 2016)

Netflix's Big Bet on Original Shows Finally Seen Paying Off

By Markets Reuters

Netflix Inc's shares jumped 20 percent on Tuesday - on track for their best day in more than three years - as original shows helped the company add far more subscribers than expected in the third quarter.

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The boom in subscriber additions, coming off disappointing second-quarter subscriber growth, allayed some concerns about the company's expensive bet on producing original content such as the Winona Ryder-starrer sci-fi series "Stranger Things."

Wall Street analysts scrambled to bump up their price targets on the stock, with most of them praising the company's focus on developing original content.

Netflix's shares were up 18.9 percent at $119.40 in midday trading, adding about $8 billion to the company's market value.

The video streaming company also said it was getting ready to spend $6 billion on content next year, up $1 billion from 2016.

"The benefits of NFLX-produced original content including attractive economics and greater control are clear and we believe returns on original spend are high," J.P. Morgan Securities analyst Doug Anmuth said in a research note.

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Anmuth said he believed Netflix was on track toward 60 million plus subscribers in the United States and about 100 million internationally by 2020.

Some analysts, however, sounded a note of caution about the company's lofty valuation and its ability to sustain its pace of growth.

"Netflix continues to spend exorbitantly for original and exclusive content, while international profitability remains elusive and competition for both content and subscribers is becoming more fierce," Wedbush Securities analyst Michael Pachter said.

"In addition, cash burn is unacceptably high, and we are skeptical that the company can successfully build a content library that will justify its high level of spending."

Netflix, whose competitors include Hulu and Inc, said on Monday it expects a higher free-cash-flow burn at $1.5 billion in 2016 as producing original content consumes more cash up front.

The company's stock trades at 131 times forward earnings.



But most analysts remained bullish about Netflix and its ability to woo subscribers with its original content. At least 16 brokerages, including Goldman Sachs and RBC Capital Markets, raised their price targets on the stock.

"We believe Netflix is still quite early in penetrating international markets, and its content strategy seems poised to help subscriber growth," Canaccord Genuity analyst Michael Graham said.

The second season of "Narcos," a Netflix original show on Colombian druglord Pablo Escobar, has proved highly popular, following up on the success of "Orange is the New Black" and "House of Cards."

The company plans to launch "Crown," a show about the reign of Queen Elizabeth II, next month.

Netflix plans to release more than 1,000 hours of original programming in 2017, up from 600 hours this year.

The company added about 3.20 million subscribers internationally in the third quarter, compared with the 2.01 million average analyst estimate.

In the United States, Netflix added 370,000 subscriptions, compared with analysts' estimate of 309,000, according to research firm FactSet StreetAccount.

"This is unprecedented growth that should drive a substantial improvement in the breadth and depth of content on the service, which should provide a tailwind to subscriber growth in 2017," said Pacific Crest analyst Andy Hargreaves.

(Reporting by Tenzin Pema in Bengaluru; Editing by Sayantani Ghosh and Saumyadeb Chakrabarty)

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