Where Does Netflix, Inc. (NFLX) Stock Go After the Pop?

Netflix stock could go anywhere, but in the long-term, content will determine its ultimate fate

Ever-volatile Netflix, Inc. (NASDAQ:NFLX) did not disappoint after it reported earnings Monday afternoon, soaring nearly 20% in Tuesday’s trading. But given the roller coaster nature of Netflix stock, many investors are right to wonder: Where will NFLX go from here?

Where Does Netflix, Inc. (NFLX) Stock Go From Here?

Well, much depends on where Netflix itself goes from here, though we shouldn’t count out the always-irrational market.

The Misleading Metric

The number that everyone mistakenly focuses on — subscribers — came in much higher than expected, driven primarily by international adds. Subscribers are certainly important, but using it as the single number to focus on is so misleading regarding the operations underlying Netflix stock.

Netflix has transitioned from being a dumb pipe, in which it pays other entities for content, and then generated middling revenue and profits, into a full-blown studio. The movie studios no longer need NFLX to distribute their content. They either have their own delivery systems or could develop them with ease.

Thus, Netflix transitioned into becoming a studio to produce its own content, and instead licenses its own content to other parties.

There are pros and cons to this strategy.

On the upside, it generates revenues from subscribers and by licensing content to third parties. So while you may not see some of its original programming for quite some time on another U.S. platform, it can license it to foreign broadcasters and appears to be using this strategy to China. Readers will recall that I said NFLX would never be able to operate in China, and I was right.

It also creates an original content library. This carries intrinsic value. In the old days, studios such as MGM would license their entire library for many years to a third-party. Sometimes titles would be sold off. Other times, an entity with a huge library would merge with another, with the library bringing additional value to the combined entity.

Where the Value Is

If, one day, Netflix stock is gobbled up by some buyer, the value will be in the form of the original content. Mind you, that day is very far off. None of the studios have any reason to buy NFLX — because they are already studios.

No, it’s the massive library of content that will be of value.

The downside is this original content is mighty expensive to produce. We had seen Netflix stock suffering from a cash drain of about $250 million per quarter. In Q3, the cash suck topped $500 million. NFLX will take on even more debt — likely very expensive debt — in the next few weeks to continue funding their studio operations.

Now, there is one other thing here that I may have been wrong about. There were a significant number of international subscriptions added. My theory is that, other than the U.K. and Australia, other cultures don’t care about Netflix. Nobody binge-watches the way Americans do. However, an admittedly anecdotal source reported something interesting to me. He works at a firm that does subtitles and foreign translations for one of the big studios, and apparently, their content is being translated at record pace. This runs contrary to what other sources tell me — that most other cultures want to see their culture’s faces on screens, not Americans.

Bottom Line on Netflix Stock

Here’s what we know: NFLX produces terrific content. Their current revenue model will not generate sufficient cash — or even close to sufficient cash — to fund operations. That means debt raises, price increases, and a heck of a lot of international additions, if possible.

There is also no way that Netflix stock is worth $50 billion.

That, however, does not matter to the market. It will price NFLX shares at these levels, I believe, for quite some time to come.

Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

Article printed from InvestorPlace Media, https://investorplace.com/2016/10/netflix-inc-nflx-stock-go/.

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