For the everyday investor and trader committed to growth
  • Home
  • Contact

Crush The Market

Netflix Smashes Expectations & Soars To Record Highs - But What About The Cash Burn?

1/23/2018

2 Comments

 
Stellar Run

Netflix has been on a tear over the last 12 months as investors continue to focus on the rampant rise of subscriber growth especially in the international market. From the image below you can see that domestic growth has been steadily rising in the US, however the real star has been international growth as Netflix has been introducing its content into several new countries.

Netflix Subscriber Numbers
Even more surprising has been the record surge in the stock from the start of this year now having risen 30% year to date.

Netflix Chart
Click image for source: Zerohedge

Netflix stock jumped higher today in the futures market after the stock closed for trading as the market digested the earnings report. I have added the latest jump taken from CNBC.com where the stock has moved a further 8% after a strong day leading up to the earnings release. It seems the company cant do no wrong.

Netflix stock price
Click image for source: CNBC

What Investors Are Ignoring


One of the key reasons why Netflix subscriber growth has been so spectacular has been due to the fact that Netflix pricing for its streaming services is extremely low. This is even more evident when you compare it to traditional cable / pay TV companies.

By keeping the pricing low its placed a huge strain on its cash flows, as the company has been spending record amounts of its cash as its business model clearly inst sustainable even though company is growing so quickly. With the chart below you can see its latest cash burn was staggering at $523 million for the most recent quarter.

Cash burn
Click image for source: Zerohedge

Whats even more worrying is the company is forecasting to burn through a total of $4 Billion in 2018.

Original Content Is Its Achilles Heel

The other key reason for the massive cash burn for Netflix is its huge budgets spent on generating its own original content. Not only has it been rising every year for the last five years, but its expected to hit $7.5 + Billion based on forecasts. (See Below)

The company's historical content spending is as follows:

2018: $7.5-$8 billion (forecast)
2017: $6 billion
2016: $5 billion
2015: $4 billion
2014: $3 billion
2013: $2 billion

Netflix content also outpaces its competitors own content budgets by a significant amount with a spend of approximately double its closest competitors content budget.

Netflix content spend
Click image for source: Zerohedge.com

The end result of Netflix business model is the company is knowingly placing huge strains on its balance sheet with the loss of billions in cash each year and rising debt which is sitting around $20 Billion to fund its yearly cash burn.
Netflix debt obligations
Click image for source: Variety

For the moment none of this matters as stock investors cheer the company on by bidding it higher and higher rewarding the company for such reckless spending that it clearly cannot sustain.

Why Low Rates Are Important?
US Govt 10 year Yield Chart
Click image for source: Seeking Alpha

Netflix like many companies listed in the US are more reliant than ever on low interest rates to fund their business model. If US Government 10 year bond yields continue to move higher it will spell disaster for Netflix and other companies who continue to accelerate their debt levels to fund their losses.

If yields move beyond 3% it will mean significantly higher interest payments and accelerate already high cash burn levels which could ultimately lead to bankruptcy under their large debt levels. However until that day its celebrations all round for investors as the fundamentals don't matter at all.

Thanks for reading this post.

Remember to share this with your friends by clicking on the Facebook & Twitter Icon's Below.

Make sure you Subscribe to Crush The Market - Choosing from the 3 options: 

Facebook, Twitter or RSS Feed on the top right side toolbar for latest posts and market updates.

Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.
2 Comments
    Tweets by crushthemarket
    Subscribe Below
    Via Social Icons
    Picture
    Picture
    Picture

    Archives

    April 2020
    February 2020
    November 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    December 2018
    August 2018
    January 2018
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016

    Categories

    All
    AUS Economy
    AUS Stocks
    China Economy
    Commodities
    ECB
    EU
    EU Companies
    FED
    Forex
    Investing
    Markets
    Pension Funds
    Property
    Superannuation
    Technology
    Trading
    US Economy
    US Stocks

    Author

    I am a private trader and equities investor that loves the trading and investing world, following the markets and everything in between.

Proudly powered by Weebly
Photo used under Creative Commons from okchomeseller
  • Home
  • Contact