Whenever I read a headline like stating that earnings don’t matter for Netflix, Inc. (NASDAQ:NFLX), which ran earlier this week in the Wall Street Journal, I find myself yelling at my laptop like a crazy person because I have heard this cliche a billion times before dating back to the dotcom bubble.
It’s true that NFLX stock surged more than 10% to $178.41 yesterday because investors were cheering the news that the Los Gatos, California-based company added a better-than-expected 5.2 million net subscribers in the latest quarter.
The company also will add more customers in the current quarter than analysts expected. It was largely overlooked that Netflix also reported net income of $66 million, or 15 cents a share, on revenue of $2.79 million, which also beat Wall Street consensus forecasts. But this double shot of good news for NFLX stock may be fleeting.
Is NFLX Stock As Hot As It Seems?
Imagine how Netflix stock would have reacted if it beat the subscriber number, but missed on the bottom line or vice versa?
The air would start leaking from NFLX shares like it was a cheap party balloon. CNBC pundits would be asking themselves whether the company’s “best days are behind it” and whether the plummeting price for NFLX stock had gotten “too cheap to ignore.” That’s what always happens when high-flying stocks begin to falter, which they always do.
Indeed, betting on non-GAAP metrics like subscriber growth can be risky. The company has reported disappointing numbers in this metric in the past. Remember the New York Times headline from last year: “Netflix, Once Invincible, Suffers Big Drop in Growth.” I don’t think even the most passionate Netflix stock bulls would argue that the company is “invincible,” especially given the its earnings, which would usually send investors running for the hills.
During the recent quarter, Netflix generated negative cash flow of $608 million, a metric that would ordinarily send investors running for the hills. Instead, CEO Reed Hastings called it “an indication of tremendous success,” figuring that the company couldn’t be able to finance new programming if it weren’t attracting new subscribers. That’s an interesting way of looking at things for sure.
Bottom Line on Netflix Stock
Unfortunately, NFLX isn’t the only company pushing alternative ways of measuring its success. The CFA Institute recently found that nearly 80% of firms in the S&P 500 provided this sort of data, which can confuse investors. To be sure, I am not alleging that Netflix is hiding its financial condition. In fact, the real story is pretty obvious.
Remember, the company is on the hook to pay more than $13 billion for programming during the next three years and it has had to borrow money to pay its bills. NFLX also expects to burn through $2.5 billion in cash this year as it continues to invest in original content amid growing competition from Amazon.com, Inc. (NASDAQ:AMZN) among others.
The company will have to pay the piper eventually, which is why I am going to remain a Netflix subscriber and take a pass on NFLX stock.
As of this writing, Jonathan Berr did not own a position in any of the aforementioned securities.