Netflix shares continue to rise despite management stating costs will rise as will borrowing. All this to create more content
So let’s think this through… how will Netflix make a profit
1. Not gonna happen, shareholders benefit from increasing valuation- smoke & mirrors like Amazon
2. Let’s get more subscribers- sure but there is a finite number of people to watch. But fighting harder with the competition but requires more investment in content and marketing
3. Reduce costs or increase price— spend less on content and marketing or charge more for subscription – unlikely to be successful in current highly competitive market. Insufficient to turn this around.
4. Sell them more stuff outside of TV content— a challenge but possible
5. Expect some big buys them it out and it’s no longer their problem, it’s the purchasers problem — ok this is my bet.
Netflix Shares rise in anticipation of greater losses more borrowing and decelerating growth… what could go wrong with cable darling Netflix.
Revenues jumped 32% to $11.7 billion for the year 2017. And there were some gems in its latest earnings report. https://www.sec.gov/Archives/edgar/data/1065280/000106528018000052/nflx-123117xex991.htm
Its voracious cash-burn requires massive borrowing. Netflix had a “free cash flow” (FCF) of negative $2 billion in 2017. For 2018, Netflix expects to burn $3 billion to $4 billion in cash, it said.
This I find hard to swallow as they have traded for 15 years not to have figured out by now how to be cash-flow positive. The goal like Uber is just to grow big, by creating new content no matter what the costs, and borrow the money to do it, and hope that revenues will eventually catch up the spend. So who’s copying whom- Uber or Netflix. I find it hard to explain to participants in my strategy classes why they can’t do this .
Total liabilities jumped by 41%, or by nearly $5 billion, to $15.4 billion. and they anticipate borrowing another $4-5 Billion in 2018 to make ends meet. Netflix earned $550M in net income but intimated they will make a loss in 2018.
Questions/thoughts on Netflix:
1. Revenue per paid member seems to be about $115 for total memberships at the current run rate. That means the average shareholder gets about 1/4 of a subscriber’s revenue per share. So by buying one share at $250 you get theoretical access to about $30 of revenue and $1.25 of profit this year and none next year. Next year for each share, Netflix will burn $6-8 of cash next year.
2. But but but … the growth … ? US member growth for the last year was only about 10%. Also the number of unpaid memberships seems to be up more than the paid ones (percentage wise).
3. Growth seems to come from international … at lower prices and lower margins.
4. Streaming revenue growth was 35.3% while subscriber growth was 24.2%. So what we see is a slowdown in subscriber growth made up for by raising prices but in an incr ask crowded competitive market.
5. Costs are rising and competition is huge. Comedian Jerry Seinfeld netted a $100 mill deal with Netflix for a tv version of Comedians in Cars getting coffee.
6. When interest rates rise, each %age increase costs $150 million and increasing.
Summary. Interesting company, but way way way over valued… unless the world population goes to 20 billion and Netflix sells all of them a netflix account.
Can you copy their Strategy- find trusting shareholders to fund Growing BIG… then figure out how to make money