Spencer Neumann Promises To Improve Netflix's Cash Flow Profile. This Is Bad, Real Bad

About: Netflix, Inc. (NFLX)
by: Oleh Kombaiev

Netflix intends to improve its cash flow profile meaningfully starting in 2020.

In my opinion, this is unlikely.

Netflix is ​​no longer the only serious player in its industry.

Commenting on Netflix's (NFLX) results in the last quarter, Spencer Neumann (CFO) said:

...we're committed to improve our cash flow profile meaningfully starting in 2020 and then each year thereafter…

He also said:

...it's not a forever in terms of using the debt markets to fund our cash flow needs, because we're moving towards that self-funding path, as I said, starting in 2020…

At my glance, these are very bold statements the realisticness of which can be checked, which I actually did.

Look here. It is not that difficult to forecast a company's financial performance within one or two years. To do this, it is enough to identify key trends and extend them.

The basic operating indicator for Netflix is the size of its audience. Here I mean streaming video, because the "Domestic DVD" segment of Netflix is dying away and does not deserve attention.

According to the current trend, it is possible to predict that the audience of "Domestic Streaming" will have reached 71.5 million by the end of 2020. It is worth mentioning that before the results of 2018 were published, the trend had assumed that it would be 75 million over the same period. In fact, this indicates a slowdown in the growth of this audience of Netflix's:

The audience of International Streaming is still growing exponentially, and here you can expect that its number will be 170 million by the end of 2020:

Netflix: International Streaming

Going further. Netflix's pricing policy in the perspective of these audiences is also subject to a trend according to which we can expect the following dynamics of increase in the price of a subscription in the next two years:

By performing simple calculations, we get a revenue growth forecast for Netflix for the next two years:

2019 2020
Domestic Streaming $ 8,856 mln $ 10,463 mln
International Streaming $ 11,224 mln $ 16,793 mln

Using the average profitability, we get a forecast of the company's total financial results:

By adjusting the received result pursuant to the company's average relative financial results over the last five years, we get a cash flow forecast:

As we can see, the current development trend of the company does not permit us to expect with confidence that in the next two years the cash flow of Netflix will at least enter the zone of positive values, though the model assumes quite a substantial growth in the cost of a subscription. And frankly speaking, this is exactly what is hard to believe.

My Thoughts

Let's think logically. Spencer Neumann promises to improve Netflix's cash flow profile, which means it will be so. But, as was shown, the current development trend of the company does not imply this in the near future. Then Netflix will have to either (1) actively raise the price of a subscription or (2) cut investments in the creation of new content.

It's important to understand that Netflix is ​​no longer the only serious player in its industry. Claims to the market share of streaming video have been made by such financial monsters as Apple (AAPL), Disney (DIS) and Amazon (AMZN). Increasing competition always means lower profitability. Therefore, a price increase will reduce Netflix's competitive ability and slow down the growth of the company.

On the other hand, cutting content creation costs in the face of increasing competition is fraught with a decline in Netflix's popularity, which will also lead to a slowdown in its growth.

So, it turns out that the intention of the company's management to improve the cash flow profile at the current stage of its development reduces its investment attractiveness.

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.