The story with Netflix, Inc. (NASDAQ:NFLX) doesn’t really change that much from quarter to quarter. Nevertheless, the market continues to behave as if NFLX stock is somehow this massive untapped gold mine, given its assigned valuation. Yet if you examine the financials, Netflix continues to be valued not merely at insane prices, but at prices that do not even reflect the most fantastical of fantasies.
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The media focuses on subscriber additions, but I consider that to be a useless number that has no meaning in a vacuum. The question is how much it cost to get those subscribers and how much they add to the bottom line for NFLX stock.
Download the spreadsheet from the Netflix stock investor relations website to follow along.
NFLX Stock by the Numbers
Domestic streaming paid memberships grew by 3.6 million, which was less than the 5.4 million from Q1 of FY15 to Q1 of FY16. However, NFLX is juicing more money out of these subscribers — $29.77 this year vs. $24.42 in 2015. That’s great news. Also good news is the contribution profit per subscriber is $12.26 vs. $7.75.
I confess surprise that NFLX stock is finally seeing some profit on the international side. As I’ve written before, I was skeptical that international consumers would care all that much about Netflix. Cultures are very different than in the U.S., as far as binge-watching and how people spend their social time.
Still, paid memberships have grown from 19.3 million in Q1 of 2015 to 45 million in this quarter. That led to the first international quarterly profit for NFLX stock of $42.6 million. The costs of acquisition are also slightly declining, from $24.89 to $22.31, but still substantially above the $17.51 in the U.S.
Domestic DVD lost another 800,000 subscribers, leaving it with about 4 million. Figure another 3 years and that division will be done. I the meantime, it did contribute $60 million in profit.
At the bottom line, after backing out other expenses, NFLX stock showed operating income of $257 million and net income of $178 million, for TTM net income of $338 million — and a stock valuation of $61.7 billion, or 182x net income. LOL.
So I really don’t get why anyone would own the stock at these levels.
What about the overall financial health of the company? The cash flow statement is where we examine that kind of thing, except I’ve always ignored that in the case of Netflix stock. That’s because it can futz with several categories — additions to streaming content assets, change in streaming content liabilities and amortization of both DVD and streaming content.
Instead, I just look at the cash and equivalents and back out whatever money was raised via financing. What I see is that NFLX burned $390 million of cash in the quarter, leaving it with $1.078 billion in cash and – at the same burn rate – means the company runs out of cash by year-end.
That, again, means another capital raise of some kind. I thought that might be challenging last year, but NFLX pulled a rabbit out of the investment bank by finding debt capital and at rates that were not terribly unreasonable.
Bottom Line for Netflix
So Netflix will continue to do what it has been doing — producing tons and tons of content, much of it of very high quality. It is now nothing more than a studio that has its own exclusive delivery system for its content. It’s not a diversified conglomerate or entertainment company.
It’s a studio, and that is the end of the story.
So of course Netflix stock is burning cash. It will continue to burn cash. It will also slowly raise prices. Yet no price increase will ever provide the revenues necessary to generate a 182 P/E ratio.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.