A Question All Netflix (NFLX) Shareholders Should be Asking

Posted by jbrumley on January 20, 2017 11:44 AM

Kudos to Netflix (NFLX) for another strong quarter of subscriber growth, and congratulations to NFLX owners who have benefitted from the bullish response to that report. Specifically, NFLX is up 5% and into record-high territory on the heels of news that Netflix added 5.1 million members last quarter, which is the biggest quarter - in terms of growth - the on-demand video provider has ever produced.

The company remains profitable too, even if only marginally. CEO Reed Hastings les the company to turn $2.47 billion worth of revenue into $66.7 million worth of net income, or a profit of 15 cents per share. All those numbers extended what's become a long-standing growth trend.

And yet, one can't help but wonder when the habit of heavy spending and overwhelming liabilities will finally catch up with Netfflix, not only keeping a lid on what most would suggest is a minimum degree of profitability,  but perhaps even pulling the company back into the red.

It's not been fully appreciated, and perhaps not even realized, is the fact that as fast as revenue is growing, the negative free cash flow and liabilities are growing at an even faster rate.

For perspective, while the top line grew sequentially from $2.29 billion to $2.47 billion last quarter, long-term debt jumped from $2.37 billion to $3.36 billion. Current content liabilities grew from $4.4 billion to $4.6 billion, and perhaps most alarming of all, operating cash flow of -$916 million to -$1.47 billion. The negative free cash flow figure of $1.0 billion also swelled to -$1.66 billion.

Those changes also extended long-standing downtrends... unfortunately. It leaves one wondering what the end-game is. That is to say, how long until the fact that debt and cash-burn overwhelms modest revenue and modest earnings growth.

To put things in perspective, the graphic below plots the long-term trend of all the key fiscal metrics.

012017-netflix

When laid out visually, a prudent shareholder has to start asking tough question of Reed Hastings, beginning with this one: Which of these trends is going to change if Netflix is to meet its profitability goals suggested for 2017 and 2018?

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