No. 1. The same flavor of irrationality --
Go ahead and laugh. But before you do, realize I've called this thing every step of the way:
Netflix's Business Model Isn't Sustainable -- Seeking Alpha, April 5, 2011. Prepare to Buy Netflix Before It Rises From the Dead -- TheStreet, July 30, 2012. Netflix Will Hit $300, Go Out of Business or Both -- TheStreet, January 17, 2013.Timestamp it: NFLX will hit $300 by summer.
Why? Because Reed Hastings has fired up the smoke-and-mirrors machine yet again. So, No. 2. Netflix has an excellent product. As somebody who covers the stock and subscribes to the service, there's no question the Netflix of 2013 is worlds better than the Netflix of 2011 from a content standpoint. As Reed Hastings explains in the company's Q42012 Letter to Shareholders, Netflix has found its content sweet spot. It owns KidsTV. It has become an excellent outlet for prior seasons of current television shows (e.g., "Mad Men"). It's about to roll the dice on original programming. And you'll be hard-pressed to find its most popular movies and television shows on competing services such as Hulu and Amazon (AMZN) Prime. That's all good, but it's simply not going to fly as a business at $8 per month. The "virtuous cycle" Hastings touts (more subscribers means more money for content, more money for content means more subscribers and so on) is actually a "vicious cycle." Always has been. That errant Disney (DIS) deal notwithstanding, content owners will not license premium content if Netflix continues to give it away, all you can eat, at $7.99 a month. Another tit-for-tat metric Hastings likes to brag about just went bust. He explained, quite transparently, in the above-linked communique to shareholders:
In the past, we have managed our content licensing agreements such that cash payments in any quarter do not exceed 110% of the P&L expense (in other words, if our P&L expense was $200 million in the quarter, our cash payments for content would not exceed $220 million in the quarter). As we shared on our last earnings call, our original programming will require more up-front cash payments than most other content licensing agreements, raising this ratio (of cash to P&L for content) to as high as 120% in certain quarters with material originals payments. The bulk of our remaining cash payments for our current originals will be in Q1, driving FCF materially more negative than Q4, and then FCF will improve substantially in subsequent quarters.
So free cash flow is plummeting. Spending continues to escalate. And cash is, once again, getting tight:
In addition, we are exploring taking advantage of the current low interest rate environment to refinance our $200 million in outstanding notes and raise additional cash through new debt financing. This would give us additional reserves as well as increased flexibility to fund future originals.After Netflix raised cash at the end of 2011, it had $508 million in cash and cash equivalents. That was up from $160 million in the previous quarter. The big jump came because Netflix raised funds in a pair of dilutive financing deals. At the end of 2012, that cash number continued to trend lower, down to $290 million. (Data from Netflix Q42012 financial statements, available at the company's investor relations' Web site).
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