Netflix Probably Should Be Bankrupt, Stock Closer To Zero

NEW YORK (TheStreet) -- For competitive reasons, I like to pick on Seeking Alpha, but I have to give credit where it's due. J Mintzmyer wrote an excellent article claiming that "Netflix (NFLX) Narrowly Avoided Doom In 2013."

While I disagree with his view of Amazon.com ( AMZN), I'm on board with pretty much everything else, particularly:
Netflix's latest sleight of hand is the move to explore taking advantage of the current low interest rate environment, while stating it has sufficient cash on hand to fund expenses. This is not true. In fact, if Netflix had not issued additional debt, there is a strong likelihood of financial disaster in 2013.
This same argument was used last time Netflix sought financing in late 2011, but this time around, people seem to fully believe the argument. Ironically, Hastings' spin is more misleading than in 2011.

On Netflix's $500 million debt deal, Mintzmyer nails it again:
The debt deal by itself makes sense. The bond markets are starved for yield and Netflix needs the cash. I'm not decrying the offering; my point is that this isn't a Microsoft (MSFT) or Intel (INTC) type of advantage play -- this cash was needed to ensure operations, and Netflix is extremely lucky to receive it.

Bingo. Those three paragraphs sum up the Netflix story.

The second I read about the company's plans to "raise additional cash through new debt financing" in its Q4 shareholder letter, I called B.S. And if you check point No. 4 at the very end of this article from Jan. 17, you'll see that I called it before it happened.

I can't pat myself on the back too hard though. If you have even a weak understanding of Netflix's business and its inherently broken model, you, like Mintzmyer, realize Reed Hastings cannot move forward with content acquisition as usual, original programming production and international expansion without a cash infusion. I've been through the numbers a million times since I started calling Netflix out two years ago and, trust me, it's simply not possible.

To think that a fine publication such as Gentleman's Quarterly could mislead its readers as it did in a recent article about Netflix is unfortunate. GQ called Netflix "a cash-rich company." Even Hastings has to chuckle when he reads crap like that.

But you can't blame GQ. They're not hip to the game. They don't follow the company like we do. We cannot expect a writer at GQ to read between the lines and sniff out the pure and unadulterated hogwash that pollutes this paragraph from the above-cited Q4 letter to shareholders:
As highlighted previously, we have sufficient cash on hand to fund our current slate of originals and ongoing expenses, and to maintain an adequate reserve, before returning to positive FCF. 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.

Hastings is quite an explorer. He makes Magellan look weak. Within days of this exploration -- you know just to take "advantage of the current low interest rate environment" -- Netflix hit the market for a $400 million ... wait ... no ... check that ... $500 million debt deal. Here's an extra $100 million among friends.

Yes, Netflix absolutely needs that money. Badly. Even desperately. Without it, Mintzmyer is correct; short of another bailout, Netflix would have had to, sooner rather than later, cease operations.

I'm tired of republishing the publicly available numbers most people choose to ignore, but here's the update, as of Dec. 31. Netflix now counts a whopping $5.6 billion in off-balance sheet streaming content obligations with $2.3 billion due in less than one year. (Data from 8K filed Jan. 29.)

But, yeah sure, Netflix has "sufficient cash." Hastings isn't just an explorer; he must be a magician if he can attach words such as "sufficient" and "adequate" to Netflix's cash situation.

Consider this. At the end of September 2011, Netflix had just $160 million in cash and cash equivalents. In November of that year it orchestrated a $400 million bailout, rehabilitating its hoard to $508 million at the end of 2011. That nest egg dwindled to about $290 million at the end of 2012.

It's deja vu all over again!

Like I have been ranting, Netflix's 2013 (though they might be able to stave things off a bit longer this time) will go down just like its 2011. Short of more bailouts, there's no other way it can go down. The mechanics of the business model Netflix lives and dies by will not change simply because Reed Hastings wants them to or thinks they should.

We're seeing the same red flags at Netflix we saw before the 2011 implosion and cash grab. So yes, I called Netflix to $100, past $100 and see it testing its all-time highs, but don't get comfortable. Not even for a second.

This 'House of Cards' will crash again. All that sustains it is the big money's willingness to let Reed Hastings run around like a kid with his father's credit card.

-- Written by Rocco Pendola in Santa Monica, Calif.

Rocco Pendola is TheStreet's Director of Social Media. Pendola's daily contributions to TheStreet frequently appear on CNBC and at various top online properties, such as Forbes.

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