Is Netflix Dead, Once And For All?

| About: Netflix, Inc. (NFLX)
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By Rocco Pendola

The headlines now blare in 2012.

On Seeking Alpha, Netflix: Stay Away, It's Still Too Expensive.

And, my personal favorite for Monday, from Wall Street Cheat Sheet, Netflix Struggles to Stay Alive.

Don't believe the hype.

If you ever should have, it was last year back when analysts were upgrading Netflix (NASDAQ:NFLX) and setting stratospheric price targets. You must remember the great Ingrid Chung from Goldman Sachs back in 2011. If not, here's something from her greatest hits record:

After Netflix's disastrous Q2 and weak Q3 guidance in July, Chung waxed bullishly, not only reiterating a buy rating and her $330 price target, but raising EPS estimates from 2011 through 2013.

Before you read this next sentence, call some family, friends or co-workers over to your computer screen, because there's nothing like sharing a laugh with others around the holidays. For 2012, Chung predicted Netflix would post EPS of $7.69.

Alongside this type of inane hysteria, I persisted through the harsh criticism I received from NFLX bulls with stories such as:

Netflix's Busines Model Isn't Sustainable

I published that article on April 5, 2011. Yes 2011. Not 2012. Now, of course, that's commonplace sentiment across the financial media and in comments' sections of articles.

NFLX dropped nearly 6% today on another analyst downgrade as well as a report from Variety (note: There's a paywall). Here's the long and short of it: Netflix might lose some programming from A&E and History Channel.

If you expect me to pile on the bearishness, you'll be waiting a while. At this point, I'm pretty much indifferent to the stock if not slightly bullish.

Throughout 2011, I repeated two points as the cornerstone of my NFLX bear case:

  • Content costs were getting out of control;
  • And old guard programmers hold the upper hand, relative to content availability and negotiations.

Both ingredients became obvious towards the end of 2011. They remain in the mix today.

However, Netflix appears to be taking a different approach to content costs.

As of June 30, 2012, the company counts roughly $5 billion in off-balance sheet obligations. While that's up from $3.9 billion at the end of 2011, it's only up by about $200 million sequentially. (*Data from Netflix's two most recent 10-Q filings at the SEC Website).

Don't get me wrong. That's still a problem, but Reed Hastings finally realizes it.

Netflix no longer does the types of massive large scale content deals it did to get itself into this mess. Or, at least it overpays for seemingly random reruns much less frequently than it did in 2010/2011.

Even more important, Netflix seems to have gained a slight bit of leverage over at least some content owners. With AMC Networks (NASDAQ:AMCX) Mad Men, it proved that consumers who watch reruns of the show on Netflix will help drive current season ratings on cable. That's something Netflix can actually call a value proposition.

The cost structure still needs work. And I have to think Hastings regrets piling up so much debt. That's really what holds Netflix back today. That errant spending of days gone by left it with very little cash to fuel what might be sustainable growth as a niche provider of cable series that need exposure, KidsTV, original programming and, if it had the cash to spend, some type of sports/entertainment-based live programming.

But, as of the close of last quarter, Netflix has roughly $800 million in cash. And you know where half of that came from - the fundraising it had to do last year when the roof caved in. $800 million can barely cut it. Plus, Netflix needs to keep some cash on the balance sheet so its creditors don't freak out.

Qwikster. The price increase. That was nothing. It hardly ever entered my radar. These things were just consequences of the larger problems that might make it tough for Netflix to ever fully recover and maintain consistent profitability - content costs and the reality that big media controls streamers, middlemen such as Netflix.

But, as bad as things look, they're better than they were in 2011. Plus, the last thing you want to do is be too bearish when that's what Wall Street analysts are, all of a sudden, telling you to do.

Disclosure: I 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.