Binge over for Netflix?

Netflix has scared the living daylights out of Wall Street. The “U can’t touch this” streaming company said it gained about one million fewer subscribers than it had expected in the second quarter, sending its normally high-flying stock down about 14% on Monday.

Expectations are high, even seemingly excessive, with Netflix looking rather expensive at roughly $400 a share (that’s equivalent to, ahem, 239 times the per share earnings that analysts expect the company to make this year).

Consider this: the S&P 500 trades at 22 times earnings, and the average media industry p:e is 14.

Also, before its earnings report Netflix shares had gained 109%, making it the second-strongest performer on the S&P 500 index.

The company blamed a strengthening dollar for its weaker-thanexpected international revenue (it doesn’t hedge with derivatives) and the subscriber-target miss was a result of faulty internal forecasting.

The company made $384m in profit on $3.9bn in sales. Netflix, in a letter to shareholders, said it had a “strong but not stellar” quarter. Remember, though, that it is falling short after five quarters of meeting or exceeding analyst expectations for subscriber growth.

So when I say “falling short”, some perspective is necessary. They still added 5.2 million subscribers from April through June, of whom about 4.5 million were outside the US. Paid subscriptions were up 26% from a year earlier.

Dstv, eat your heart out.

Still, investors are slightly restless, and asking: is this is just a minor glitch or a sign that the company’s boom, boom, boom expansion is slowing?

Daniel Ives, chief strategy officer and head of technology research at New York-based GBH Insights, says the results were a “near-term gut punch” to the Netflix bull thesis. He maintained his $500 price target on the company though. UBS downgraded the shares to neutral and cut the price target to $375 from $425, even before the results.

More long term, guys are also thinking: at some point, anyone interested in signing up for a streaming service will have done so and Netflix will hit a ceiling. Rivals with equally deep pockets (like Apple, Amazon and AT&T, which now owns HBO, Warner Bros and CNN) will close in, lure away existing subscribers or prevent new ones from signing up with Netflix, which frankly, and as much as I love it, cannot be all things to all people.

One thing is clear: it will be a long time before Netflix gets to positive cash flow. The company burnt $559m more than it brought in, 8.8% less than the same quarter last year.

Negative free-cash flows of $3bn$4bn are expected for 2018 (value investors look away now). Debt stands at $8.5bn.

e:

Hey, big spender

There’s an awful maxim that no-one claims responsibility for coining: “You have to spend money to make money.” It comes to mind when thinking of Netflix and its proclivity to burn cash in the content arms war.

Goldman Sachs estimates that Netflix could be spending $22.5bn on content a year by 2022.

That’s more than any of the legacy Hollywood studios.

Netflix is not too bothered though, it’s betting operating profits will grow, content spend will slow down and eventually free cash flow will turn positive.