Succeed by Losing: Netflix Has "No Real Competition" (That's Easy When You Lose $2.5 Billion)

Mike Mish Shedlock

Supposedly Netflix had another good quarter. Why? It topped analysts' estimates. "Reported" profits doubled to $130 million. Actual losses will hit $2.5 billion. Who can compete with that?

Investing columnist Philip van Doorn has an interesting opinion article on MarketWatch: Netflix Shows it has No Real Competitors.

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.

Lofty Valuation

Doorn says trading at 92 times earnings is a lofty valuation. Indeed it is, since Netflix has no real earnings.

Deep Pockets

How can a company keep bleeding massive amounts of money? Bloomberg notes "deep pockets".

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

Streaming Losses

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

Comments (23)
No. 1-23
pyrrhus
pyrrhus

The current investment scene makes the 1929 climate look like the height of conservatism....There are parallels, though. RCA in 1929 was losing money, but traded at more than $300/share.When RCA finally made money, years later, it traded at a small fraction of that price.

Medex_Man
Medex_Man

The problems with cable TV include (1) they promised consumers would pay a monthly fee INSTEAD of watching ads.... then they put ads on every channel AND more ads per show AND product placements inside the shows; (2) there were 900 channels and nothing on. Thousands of repeats. A dozen "news" channels that all parrot the same misinformation. And countless "independent" movies, mostly extremist hippie cr-p.

Medex_Man
Medex_Man

Netflix wants to raise prices now (just like a cable company)

Medex_Man
Medex_Man

Netflix is funding lots of "original" movies advocating gay rights and black characters -- while IGNORING mainstream programming. Same political nonsense that turned consumers against cable channels

Medex_Man
Medex_Man

Higher prices to fund outlier political positions -- while ignoring mainstream programming? This movie already didn't work

Medex_Man
Medex_Man

And lets not forget that the guys (and gals) who climb telephone poles and run the wires needed for cable and for internet get short changed by both cable and internet providers.... while jocks who can't spell math are paid millions to protest their own country. Follow the money here folks, if STEM is important, and internet connectivity is important, then why pay dumb jocks millions and give tax exempt debt funding to football stadiums???

dyleck
dyleck

UBER is pretty good competition if you consider "earnings" only. :D

MorrisWR
MorrisWR

Netflix has raised prices but will need to do so again. This statement brought me back to the heady days of 1999: “By traditional measures, that level of valuation is outrageous.”. Perhaps we are once again in a new economy or another permanent plateau. Amazon was in a similar situation, as were many other dot-com companies, back then but most crashed and burned. Netflix may become profitable and be the major player but I would not bet on it at current pricing. Maybe after a major drop in share price.l and if they are still viable.

thimk
thimk

Thank you wall street for funding a losing streaming content provider . For less than 10$/MN , I receive an incredible array of movies and documentaries , many very current. The digital output is

GraveNewWorld
GraveNewWorld

This opening... "Reported" profits doubled to $130 million. Actual losses will hit $2.5 billion.

thimk
thimk

Continued : Is very clear and the content can be stopped and watched later . Please note the sarcasm . If prices rise i will discontinue service .

GraveNewWorld
GraveNewWorld

This opening.. "Reported" profits doubled to $130 million. Actual losses will hit $2.5 billion. Not sure I understand. A profit number would take the loss into consideration right? So profit would roughly equal subscription/purchase revenue minus the cost (loss?) of content. So you cannot say that actual losses will hit $2.5b. Right? Am i missing something?

shamrock
shamrock

They have almost 60M subscribers, if they get that to 75-80M they will be profitable.

BornInZion
BornInZion

Once a customer views content, that content no longer has value for him. So they not only burn cash for new content, they devalue their "inventory" by distributing it. (One per customer, at best.)

JonSellers
JonSellers

Interesting. Of the FAANGS, one (Apple) produces physical products. Of the four Internet only companies, the two that make real money, Facebook and GOOG, rely on advertising revenue. The two that are essentially distributors, Amazon and Netflix, don't really make a profit. And Facebook and GOOG are monopsonies to advertising companies.

Stuki
Stuki

At the root of this, is the same silliness that is fueling the current chapter of the never-ending AI hype saga: Free money in infinite quantities. Giving the illusion that there are more resources available than what is reality. Hence that ridiculously future focused, capital needy, speculative projects; can be completed and, at some point, become value adding.

While, in reality, the resources aren't there. The money pouring into Netflix in exchange for debt and equity, aren’t representative of actual available resources. Just state sponsored forgeries of same. While the only people, even within Google itself, who believe the “AI revolution” story, are the sales and PR guys.

Medex_Man
Medex_Man

@stuki -- If one reads the research from Google's autonomous car engineers, they seem to suggest it will be many many more years before driverless cars will work "everywhere" (everywhere a typical consumer might drive). There are serious problems with those autonomous vehicles on bridges, in construction areas, in snow --- the data used to train the vehicles was based on clear, well marked, pot-hole free roads around Google. The data for roads around Chicago or NYC (pot holes, cracks, wire-mesh "covers" over construction holes, etc) is sparse. And it doesn't snow in most of California. The AI system can't learn about scenarios where it has no training data. The engineer report from IBM's Watson team, where they discuss how Watson "won" its Jeopardy, is full of caveats and limits to the types of questions Watson could handle. When they write about AI, I notice the media reports, written by "communications" majors who couldn't handle basic calculus or programming 101, leave out all the caveats and things that need further development. This doesn't mean the AI story is necessarily wrong -- but it does mean it will take a lot longer than media "experts" project for the applications to catch up with the hype.

Medex_Man
Medex_Man

Netflix has the same problem as all the other movie studios... there are a LOT more sales executives in the world than there are people who can develop creative stories. Ed Catmull's book on Pixar (titled "Creativity" or something close?) has a long section on the importance of protecting Pixar's creative talent from the much bigger Disney sales machine. It takes 3-5 years to take a story idea and develop it into a good movie, but less than six months for the Disney sales machine to saturate the world with the movie and action figures and product tie-ins. The sales force tends to get paid more, under the bizarre MBA thinking that sales is "revenue generating" while creative types are cost centers.... Netflix hasn't solved, or even addressed, that erroneous thinking

KidHorn
KidHorn

I'm not sure what's meant by no competition, but Amazon Prime offers pretty much the same thing as Netflix with a Prime membership. Everything but the original content each produces. I subscribe to both because they cost almost nothing each month compared to what I pay to Verizon. But if I had to keep one, I would keep Amazon since it's a free add on to prime and I listen to amazon music also.

MorrisWR
MorrisWR

Amazon Prime is similar in the streaming aspects. Netflix does also offer the DVD service, which is cheaper than Amazon streaming. Amazon Prime is nice if you don’t mind paying quite a bit more for the movies and getting them right away. You have the option of purchasing the movie as well. If Netflix raises their DVD prices again (they did not long ago), I think Amazon will be the beneficiary and I will probably drop Netflix.

peldestein
peldestein

Now a days, apps like Cinema apk are available to watch all HD movies and TV shows for free on Android devices. Get it from

GlenDixxon
GlenDixxon

You can watch any favorite TV program on Mobdro application, this is the best and most useful application in 2019. See more and download Mobdro for Windows right here: https://mobdroplus.com/download/mobdro-for-pc/


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