Netflix (NASDAQ: NFLX) has established itself as a major entertainment company; complete with a 14-story headquarters and studios in Los Angeles. Yet, Netflix’s financials demonstrate that the company seems to be incapable of making money.
Netflix has a growing income and revenues but it is burning through cash at an alarming rate. The company reported losing $1.855 billion (€1.56 billion) in cash from operations on September 30, 2017.
Those cash from operations losses have been growing at an alarming rate, Netflix reported loosing -$1.16 billion (€980 million) in cash from operations in September 2017. Worst of all it has not reported a positive cash from operations number since December 2014.
Netflix has been Losing Money on its Operations for Three Years
If these numbers are accurate, Netflix has been losing money on its operations for nearly three years.
Nor is it just cash from operations, Netflix reported -$453.57 million (€382.45 million) in free cash flow on 30 September 2017. Netflix has not reported a positive free cash flow number in three years, since September 2014 when it reported $15.17 million (€12.79 million).
Those numbers are in stark contrast to Netflix’s revenues and income. Revenues have been growing at Netflix, it reported a 30.33% year-to-year revenue growth rate on 30 September 2017.
Netflix reported $10.88 billion (€9.17 billion) in revenues on September 30, 2017, and $8.176 billion (€6.89 billion) in revenues in September 2016. It is capable of a lot of revenue growth, and fast income growth.
Netflix’s income grew dramatically in the 12 months between September 30, 2016, and the same day in 2017. Netflix reported $163.11 million (€137.54 million) in revenues in September 2016 and $440.16 million (€371.15 million) a year later.
Netflix is in a Race against Time
These disparate sets of figures tell us that Netflix is in a race against time. The company is struggling to grow its revenues fast enough and big enough to cover the losses before the bills come due.
Netflix is also borrowing a lot of money to cover its losses and keep the company in operation. Netflix reported $2.522 billion (€2.13 billion) in cash from financing on 30 September 2017.
This number indicates that Netflix borrowed around $2.552 billion (€2.13 billion). Not the most responsible strategy for a company with revenues of $10.88 billion (€9.17 billion) and liabilities of $13.62 billion (€11.48 billion) on September 30, 2017.
What’s scary is that those liabilities now approach the value of Netflix’s assets which was $16.95 billion (€14.29 billion) on September 30, 2017. It looks as if Netflix has borrowed a mountain of debt, and is now rushing to find ways to pay that debt.
The Stock Price is Sustaining Netflix
Skeptics will wonder what is sustaining Netflix; the answer is simple, the ridiculous stock price.
Netflix had a share price of $187.90 (€158.44) on 26 December 2017. That gave it an Enterprise value of $84.76 billion (€71.47 billion) and a market capitalization of $83.34 billion (€70.27 billion) on 22 December 2017.
The vast majority of Netflix’s valuation is based on stock price, not actual value. Just $4.6 billion, or a little over 5% of Netflix’s enterprise value is based the company’s actual value. If Netflix’s stock price falls, Netflix will collapse.
Netflix’s Business might not be sustainable because Hollywood will loot it
This calls Netflix’s sustainability and the viability of its business model into question. All it would take is bad publicity from one big box flop or lousy series to send Netflix into the death spiral.
To make matters worse, big-time Hollywood players such as movie stars, producers, and directors are now in a position to loot Netflix. Netflix’s decision to cast an A-list star, Will Smith, in its’ new movie Bright is a sign of this. Even if Bright is a hit, most of the money it makes will go to Smith and his agent – not Netflix.
Nor is it just Smith; movie mogul and alleged sexual predator Harvey Weinstein tried to force Netflix to pay him $25 million (€21.08 million), Page Six reported. Weinstein; who has a couple of shows on Netflix, was trying to force the company to pay his legal bills or pay off his victims.
Why Netflix might Never Make Money
Netflix is proving that the old description of entertainment as a black hole into which money disappears never to be seen again is absolutely true. As it grows larger and more profitable, Netflix simply becomes a bigger target for the Hollywood predators.
That shows us why Netflix might never make money; it simply lacks the resources to fight off the entertainment industry wolves. Companies like Walt Disney (NYSE: DIS) and Amazon (NASDAQ: AMZN) are big enough and rich enough to scare the wolves away. Netflix is still small and weak so it is natural prey for characters like Weinstein.
That makes Netflix a terrible stock that investors should stay away from even though it offered a 15.05% return on equity on 30 September 2017. Sooner or later the share price and Netflix itself will collapse.
Persons that want to preserve their investment would be better served by Disney. Disney is making money, and it will probably be in a position to buy the remains of Netflix for pennies on the dollar in the near future. The only way Netflix will be able to survive is as part of a larger organization like Disney or Verizon (NYSE: VZ).