To make the only half-sarcastic point that Netflix (NASDAQ:NFLX) might need to add the "going concern" boilerplate - usually reserved for penny stocks, development stage companies and such - to future SEC filings, all I really need to do is supply two images from the company's most recent quarterly reports.
Click images to enlarge
From Netflix's 10-Q covering the second quarter, filed roughly three months ago:
Simply put, Netflix's off-balance sheet obligations due within the next five years increased by about $1 billion between the second and third quarters. This does not include streaming content deals signed so far in the fourth quarter. It also does not include costs that have hit the books, including, but not limited to, expenses associated with international expansion.
This stark reality sat at the core of my bear thesis from day one. Review my article from April 5th, Netlfix's Business Model Isn't Sustainable, for a truly shocking look at the trajectory of Netflix's 2011 implosion. Oddly, on Thursday (of this month) another financial website asked the following question:
If I did not answer that question sufficiently six months ago, Netflix did today with this tidbit tucked away in the company's just-released 10-Q:
In the third quarter of 2011, we made a series of announcements regarding our business, including the separation of our unlimited DVD by mail and unlimited streaming plans with a corresponding price change for some of our customers, the rebranding of our DVD by mail service, and the subsequent retraction of our plans to rebrand our DVD by mail service. Consumers reacted negatively to these announcements, adversely impacting our brand and resulting in higher than expected customer cancellations and a decline in net subscriber additions. These adverse effects, coupled with the increasingly long-term and fixed-cost nature of our content acquisition licenses, will likely continue to have an adverse impact on our results of operations. If we are unable to repair the damage to our brand and reverse negative subscriber growth within our domestic segment, our results of operations, including cash flow, will be adversely affected (emphasis added).
That really says it all. I've got to give Netflix credit (assuming the SEC did not force this on the company). Even though the company is still attempting to pass its problems off on the price increase and Qwikster stillbirth, it's getting closer to telling investors what many bears have known all along. Content acquisition costs render the company's business model unworkable. They can bury that reality between the above-mentioned "adverse effects" all that want, it will not make it go away.
I don't think it's too early to say that Len Brecken was right when he said the following back in May:
Ultimately, the accounting will catch up and the entire streaming effort will be labeled a ruse and the stock will be under $5 per share or bankrupt by the end of 2012. In my view, NFLX will not be able to meet its obligations to Hollywood, as by 2012, I expect the combination of churn and competition will result in negative cash flow and declining subs.
I will be opening a short position via long puts in NFLX tomorrow. I'm not worried about a buyout because no company in its right mind is going to take on billions and billions of dollars worth of obligations just to buy a broken brand.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in NFLX over the next 72 hours.