– Reports Q2 2019 results on Wednesday, July 17, after market closure
– Revenue Expectation: $ 4.93 billion
– EPS Expectation: $ 0.56
As the profit date approaches, Netflix (NASDAQ 🙂 continues to enjoy investor confidence, with the shares less than 10% off the 52-week summit. But that stick can be uncertain.
Netflix has a debt problem, has a high debt burden and spends money at an unprecedented rate. That, plus the increased competition that is expected in the following year, could cause this entire house of cards to collapse.
This is what we are looking for in
All growth is not equal
Netflix is ​​undeniably a success story of growth. The company is constantly growing its subscriber base and revenue on an annual basis. Last quarter, Netflix's worldwide sales represented $ 4.52 billion, a 22% increase over the first quarter of last year's global sales. The number of Netflix subscribers is also increasing. Netflix grew the number of subscribers worldwide by 25.2% to 148.8 million.
US sales, at $ 2.07 billion last quarter, grew at a rate of 14%, while international sales grew at around $ 2.36 billion at 32.8%. This may not seem important until you see the differences in profit margins: 34.4% for the United States, but only 11.6% for the international segment. Not all growth is equal and Netflix grows more where users bring in less money
Netflix already has a broad penetration rate in the United States, but we see that aggressive growth is still priced at the moment, without having to take into account that Netflix's growth will be less profitable than at the moment .
Debts and spending Still Loom Large
The Netflix business model has always entailed huge debts and it has not changed in the past year. Netflix's total contractual obligations (substantive obligations, debts and other obligations) have risen from $ 28.4 billion in the first quarter of last year to $ 36.1 billion in the first quarter of 2019, an astonishing $ 7.7 billion, or 27%. With a profit before interest, taxes, depreciation and amortization (EBITDA) of $ 1.7 billion, Netflix has 21x more future liabilities than the current EBITDA.
This is not a problem at the moment because Netflix is ​​expected to grow its EBITDA by the time it has to pay these commitments, but these commitments will become dangerous and the stock will become very volatile if a hiccup occurs along the way .
Netflix is ​​expected to spend $ 15 billion in content this year and the trend of spending is still increasing. Netflix was continuous cash flow negative, including a negative $ 380 million in the last quarter. Given the expected spending in the coming years, it is unlikely that Netflix will be able to have a positive cash flow until at least 2022. The only way for Netflix to achieve this is to reduce spending and further increase subscription costs. But can it afford to do that? We will be looking for management comments on their plans to control their influence.
Fighting the Avengers (and others)
Competition puts Netflix under pressure on two fronts: the content side and the cost side.
Netflix, as the first mainstream service of its kind, has taken a dominant position in the streaming market. It dedicates billions of dollars to maintaining this position, but doubts still creep in about the ability to do so.
Competitors throw up their spending on content. Now under the umbrella of AT & T & # 39; s (NYSE :), HBO wants to become more mainstream, moving away from the high-quality niche to compete with Netflix. It has already caught "Friends", one of the most popular shows on Netflix, for its own regular HBO Max service that will begin in 2020.
Walt Disney (NYSE 🙂 is expected to launch its streaming service, Disney +, in November, which costs $ 7 (compared to Netflix $ 13), and will provide access to content owned by Disney, such as the universes of Marvel and Star Wars. . Of course Amazon (NASDAQ 🙂 is worth mentioning, even though it is an older competitor and it also pays to know that Apple (NASDAQ 🙂 has revealed that it will soon launch its own Apple TV + streaming service.
The cost of creating content is so high that it is likely that only a few companies will be truly sustainable cash flow in the coming years. Some of these services will inevitably fail and Netflix's leverage means that if it fails, it will be a spectacular failure
One more thing to note is that Netflix is ​​a stand-alone company, while Disney, Amazon.com (NASDAQ 🙂 and Apple have different sources of income that allow them to undermine Netflix and actively subsidize subscriptions to attract consumers. Netflix is ​​limited by its lenders and they have already mined a huge amount of debt.
Bottom Line
I do not consider Netflix a safe investment. There are too many fundamental questions that we do not yet have the answer to. I see Netflix as a fragile company from a financial point of view, given its influence.
Unfortunately, quite a few clouds also appear on the horizon, including less profitable international growth and increased competition. In the current growth and interest rate climate, it is not recommended to close a company without a direct negative catalyst. But over a longer time horizon, I expect the Netflix stock price to better reflect the risks.
