The Real Netflix Problem In One Simple Chart

Jul. 20, 2018 5:26 AM ETNetflix, Inc. (NFLX)129 Comments
James Brumley profile picture
James Brumley


  • Slowly but surely competitors are COLLECTIVELY chipping away.
  • The company has got a whopping $16.4 billion in bills to pay... soon.
  • Netflix, for all its growth, is still bleeding cash with no end in sight.

C'mon… you didn't really think streaming video giant Netflix (NASDAQ:NASDAQ:NFLX) could keep adding subscribers at a breakneck pace, did you?

Thing is, that's not the core problem for Netflix in and of itself. Netflix is still the world's biggest and arguably the best on-demand video platform, and isn't about to be dethroned. It could move sideways on the member growth front for years and still not be eclipsed by a rival. If we're being intellectually honest with ourselves though, it was the strong user growth rates that allowed a slew of investors to overlook some glaring balance sheet concerns.

Those pitfalls can't be ignored any longer.

Here Comes Consequence

On the off-chance you're reading this and don't already know, last quarter, Netflix added 5.15 million new users. Progress is progress, but for the record, that was the lowest subscriber growth figure seen in over a year, and fell short of the 6.2 million Netflix had modeled, and the 6.3 million Wall Street expected.

Most everything else was… ok. Revenue of $3.91 billion was $30 million short of expectations, but that's a tough figure to handicap, and sales were still up 40% year-over-year. Earnings of 85 cents per share more than doubled from the Q2-2017 figure of 32 cents, and topped the market's estimate of 79 cents.

The disappointing subscriber growth figure, however, was just a little too alarming to some.

MoffettNathanson Research's Michael Nathanson is one of the concerned observers, noting of the company's quarterly report:

We maintain our view that Netflix's cash flow does not support today's valuation because we assume that it will be more expensive for them to produce and market content than the Bulls think and the economics of the next 75 million international subscribers will be less efficient than the first 75 million international subscribers.

This article was written by

James Brumley profile picture
The Well-Rounded Investor newsletter is the culmination of a couple of decades' worth of not just experience within the financial services industry, but different kinds of experience within the industry. Brokerage, money management, journalism and more, with approaches ranging from short-term trading to buy-and-hold fund selection. Different schools of thought too, with practical applications of contrarianism, melding fundamental and technical analysis, and possibly above all else, learning when and how to ignore the news. Now that wealth of experience is being put to use in a way most investors have never seen before... in a practical way that makes sense, and acknowledges that investing in today's market requires adapting several (and ever-changing) ideas. The premise of yin-yang is only a glimpse of how the Well-Rounded Investor service considers all matter that impact your investments, and responds accordingly.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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