The golden age of Netflix, Inc. (NASDAQ:NFLX) is over. Many years ago, it was the only streaming provider in town. It made licensing deals that amounted to billions of dollars. Studios were still relying on DVDs for the majority of their ancillary revenue. They were happy to have a new party pay them for streaming rights.
Everyone said NFLX would never survive because they could never pony up the billions for all that content.
That wasn’t the real problem, though, because the studios would gladly renegotiate deals as long as they could suck NFLX dry, let it raise new capital and suck it dry again.
Things gradually changed. New streaming players entered the market, as Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL), Hulu and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) got into the game.
Now there was competition for exclusive rights, and the studios could also generate more money from non-exclusive multi-party payers for content. So, NFLX pivoted and starting spending money on a few original programs to distinguish it from the other services and keep subscribers.
Things have evolved yet again and the news is bad for NFLX. The studios all have their own streaming technology now. With Roku and Amazon Fire and other devices, viewers can access every service. It’s just a matter of what they want to pay for.
The Writing Is on the Wall for NFLX
CBS Corporation (NYSE:CBS) just announced the new “Star Trek” TV series would air on regular network TV and then move to its proprietary paid streaming platform a day later. NFLX doesn’t get it. CBS can make more money streaming the program itself.
Thus, licensing content to third parties will not be the default option for studios anymore. Is it any wonder that NFLX is now moving into original programming even more aggressively than before? No, it isn’t.
Herein, however, lies a massive problem for Netflix and NFLX stock. What we learned in NFLX’s Q2 results, as opposed to what management tells us, is that subscribers are not absorbing the very minor $2 monthly price increase very well. Nor should they, since there are so many other streaming services with the content that they want available.
This also means, however, that as good as Netflix’s original content is, audiences just don’t care enough to pay for it. That’s a big, big problem. Netflix is aiming to become a quasi-HBO, but that strategy does not initially appear to be paying off. Domestic subscriber additions are flattening out. International growth may also be slowing.
I’ve discussed this in the past. Other cultures don’t “stay home and Netflix”. Other cultures go out to cafes and pubs and socialize. They want some form of streaming service since they are hard to come by, which likely accounts for the growth that Netflix has seen so far. However, other cultures are not chomping at the bit for original content because other cultures want to see their faces and their ethnicities drive content, not Americans.
This means that revenue growth at NFLX is going to start to struggle. Even worse, Netflix has already said it would return to the debt markets to keep funding its original programming. Well, as it is, the last round of debt cost it 10% interest. That’s not going to improve going forward.
Also, NFLX blew through another $254 million in cash in the quarter, keeping the quarter-to-quarter trend alive. $35 million of this was just from debt service.
The tide has turned. NFLX is no longer the stock that can do no wrong. Its business model is in trouble. Sell it now.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
