Is Netflix (NFLX) stock in danger of another loss like the one NFLX shares incurred a few years back?
Maybe, according a new article in Barron’s.
The article notes that NFLX stock — which has been popular thanks to the rise of streaming video — could take a tumble because of free cash flow.
For the past five quarters, Netflix has generated free cash flow at about $3 per share of NFLX stock below its earnings. (In short, cash shortfalls typically come from companies making large capital investments such as Netflix’s new content deals with TV and move studios.)
“Wall Street predicts earnings per share will total $1.76 this year and jump to $7.16 a share by 2015, including the cost of employee stock options. But the latter estimate may be at risk, judging by free cash flow, which over the past five quarters has been about $3 a share below earnings.
Such free cash shortfalls can stem from big capital investments, which subtract from free cash right away but earnings only little by little over future quarters. Wedbush Securities analyst Michael Pachter believes Netflix’s spending on original programs are responsible for the difference.
If he’s right, production costs may begin to create a snowballing drag on earnings.”
Not the First Fall for NFLX
After seeing a mini-crash from late 2011 through 2012, NFLX stock rebounded and recovered all loses from the fall.
Its popularity in part has been responsible for its resurgence — as shows like House of Cards and the return of Arrested Development lured subscribers to the service.
But like with Amazon (AMZN), Netflix stock is in the hand of the consumer — which is why AMZN pushes very hard to get customers into its pay Prime service.
For Netflix, though, the high wire act is to keep growing its customer base while growing its movie and TV offerings, which gets difficult as production costs for its popular shows mount and its licensing agreements grow.
As MarketWatch points out, there are two ways to increase cash flow for the company: “Bring in new subscribers, or raise monthly subscription prices. And the company has been loathe to consider raising its monthly streaming-subscription fee of $7.99 a month [in the U.S.] since the initial debacle of splitting pricing plans for streaming and DVD rentals more than two years ago. That move led to Netflix losing customers and a 75% share slide between July 2011 and the end of the year.”
As of morning trading, NFLX is still down about 1% from less than a week ago.
