Succeed by Losing: Netflix Has "No Real Competition" (That's Easy When You Lose $2.5 Billion)
Mike Mish Shedlock
Netflix Inc. NFLX had another good quarter, as subscriber growth accelerated and topped analysts’ estimates. A slew of analysts raised their price targets for the stock.
In the past 12 months, Netflix has achieved sales growth that puts it near the top of the FAANG group, which also includes Facebook Inc. FB, Amazon.com Inc. AMZN, Apple Inc. AAPL, and Google parent Alphabet Inc. GOOG.
Shares of Netflix are trading for 92.7 times the consensus 2018 earnings-per-share estimate. That is a lofty valuation, exceeded among the FAANG group only by Amazon. By traditional measures, that level of valuation is outrageous. But as we have seen with Amazon, investors will reward a company if they are convinced that management’s long-term investment in growth is worthwhile.
Many of the more traditional content distributors and creators have been putting up decent, or better, sales numbers, but the industry is in the midst of a dramatic realignment, and Netflix appears to be on the leading edge.
Doorn says trading at 92 times earnings is a lofty valuation. Indeed it is, since Netflix has no real earnings.
To buy programming, you need cash, and Netflix is still burning through it at a fast pace, even though the company promised to begin generating substantial profit after completing its global rollout.
Netflix forecasts negative cash flow of as much as $2.5 billion in 2017, with more losses coming in the years ahead, and has raised even more than that over the past year with a $1 billion U.S. bond sale last October, a $1.4 billion euro-bond sale in April and a deal in July for a $500 million credit line.
With cash and short-term investments at $2.16 billion last quarter, the highest since the end of 2015, the company looks set for the time being.
Negative Cash Flow
How to Succeed
The goal is to lose so much much money that no one can compete. This model works until funding dries up. Netflix has over $2 billion in "cash" (debt actually, that it can spend as cash). It will need to raise another $2.5 billion or so next year.
If and when Netflix ever makes a dime, it's actual P/E will be in the hundreds or thousands, not 97 as Doorn stated. It has no P/E now because it's losing billions of dollars a year.
This constitutes success.
If consumers or investors turn on the company, it will be out of business quickly. Meanwhile, insiders will have cashed out countless billions of dollars in stock options.
The setup reminds me of Countrywide Financial. CEO Angelo Mozilo cashed out a billion dollars in stock options as he ran the company into the ground.
Mike "Mish" Shedlock