Avoid Netflix On Cash Flow Issues- Part 2

Nov.23.11 | About: Netflix, Inc. (NFLX)

On November 13, I published an article bearing the title: "Avoid Netflix (NASDAQ:NFLX) on cash flow issues." The main point of this article was to pinpoint a specific cash flow gimmick that Netflix has been employing in its Cashflow statement, and to warn potential would- be investors that Netflix is gaming its cashflow statement.

I will briefly summarize my point: While Netflix recorded its DVD library as an asset on the its balance sheet, it refrained from recording the expenses incurred by it as an operating cash expenditure and rather decided to record it as an investing action to be included in the Cash Flow from investing activities.

My claim was that by extracting normal operating cash outflows from the operating section, the Cash position of the company misleadingly appears much more impressive than it really is. In other words, Netflix is window-dressing its Cashflow Statement.

The consequences were quick to follow. On November 22, Netflix announced that it intends to raise $400 ML of capital in stock and convertible notes. You can check on the full story here.

This move by the company seems especially harsh and desperate considering the fact that only a month has passed since its latest public conference when the company explicitly stated that "current cash on hand is adequate to support the growth of the business", see here.

I must admit that it is rather puzzling how a few short weeks can change things from top to bottom for the company.

As always, analysts are late to the party. Suddenly, Wedbush Morgan is worried about the company's performance and warns of imminent danger to its liquidity position.

The company's spokesman, though, was quick to comment and say that “We have no cash or general liquidity needs, and therefore have no immediate plans to use this capital.”

RIGHT. Now, who do you believe?

Disclosure: I am short NFLX.