Just about every financial writer has said the same thing about Netflix, Inc. (NFLX) stock every quarter — “This is it! This will tell the fate of Netflix stock!”
I’m sheepishly admitting that I am joining that crowd regarding this quarter’s earnings report, due April 18.
Let me clarify what I mean about this statement. I’m not saying NFLX will deliver numbers that cause Netflix stock to fall 90% or rise 100% overnight. I’m saying that the numbers it delivers are going to show what I believe is an indication of its long-term trajectory that bulls simply cannot deny.
That trajectory will be down.
NFLX Stock Poised for Problems
The issue with Netflix stock is that momentum investors climbed in, brought along every other kind of investor, and at some point the momentum investors will pull out. That will send Netflix stock into a tailspin that does take it down 70% to 90%.
Again, I’m not saying that happens this month, but that the numbers will show that Netflix cannot possibly become the earnings machine it needs to be in order to justify its valuation.
The market for Netflix stock only sees one thing: the number of subscribers. It doesn’t pay attention to anything else. Those subscriber numbers may even increase in Q1, but all the underlying metrics are going to continue to deteriorate. That’s where the real story is.
NFLX revenues have been rising year-over-year, and probably will do so again, maybe hitting $1.95 billion or so. Yet all of its expenses have been rising also, so analysts see about $17 million in net income, which would down by $6.6 million YOY.
Yet even the net income statement isn’t where the real damage will be hiding. The first place to look is the segment information spreadsheet NFLX publishes. Based on my estimates, DVD subs will fall to about 4.8 million, and generate about $142 million in revenue, providing about $71 million in contribution profit, or about 50% margins.
Domestic streaming revenues will grow again to about $1.18 billion, and enjoy about 33% margins. International streaming revenues will hit $616 million, and lose about $100 million in contribution profit.
So once again, we will see this very impressive growth in revenue utterly destroyed by expenses.
This will take us to the cash flow statement. Last year, Netflix stock burned through about $750 million in cash. The only reason it finished with another $700 million of cash on its balance sheet was that it raised additional funds via very expensive debt.
And this, my friends, is where the ugliness is found. NFLX stock will have about $275 million in negative operating cash flow, on its way to a year in which it will likely have negative operational cash flow of a billion dollars. Netflix management has even said it would have to raise more capital this year.
That capital will cost it dearly, probably at least 10% interest per year.
The fact that all these underlying metrics will continue to deteriorate is what the real story will be. DVDs will continue to waste away as international streaming losses mount. Domestic streaming is going to cap out at some point, forcing a price increase, resulting in subscriber loss.
NFLX is spending more and more on original programming and foregoing renewal of other content. There is increasing competition for streaming, and Netflix is no longer the “must-have” streaming service when just about any programming can be had from another provider.
Netflix will never crack China, which investors refuse to acknowledge. Netflix lost domestic partner Walt Disney Co (DIS) to Alibaba Group Holding Ltd (BABA) over there. Netflix culture does not translate in most countries. People don’t sit around and watch Netflix with their friends. They go out to pubs and cafés. That’s why NFLX will never make much money internationally.
All these trends will become increasingly apparent beginning this quarter.
The time to short NFLX with tight stops, or buy puts, is here.
As of this writing, Lawrence Meyers owned shares of DIS.
