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Netflix, Inc. (NASDAQ: NFLX) reported earnings on Tuesday, and the stock went hog-wild in after-hours trading, up over $50 a share to $403.
The media and investors seem crazy over one number, and one number only, when it comes to Netflix earnings: subscriber growth.
So here it is: Netflix added 4.4 million subscribers in Q4, after saying it expected 4 million. So everyone went crazy. This, by the way, brought 2014 total additions to 13 million, which was even bigger than the 11.1 million added in 2013. Netflix now has 57.4 million subscribers, expects to hit 61 million in Q1, and said it will finish international expansion in two years.
I guess that means they’ll be topping out in subscribers, which means they are going to have to increase prices. The reason is because of one important number nobody seems to care about, despite its importance.
That metric is free cash flow. It was negative $78 million in the quarter, down from negative $74 million in Q3, from positive $16 million in Q2, and from positive $8 million in last year’s first quarter
You expect this from a company that is weak on sales or has huge capex it needs to fund for expansion. Yet that’s not the case for Netflix.
Netflix generated revenues of $1.48 billion in the fourth quarter, about $80 million ahead of expectations. It also beat EPS expectations of $0.45 by 32 cents, coming in at $0.77. Net income, however, for the fourth quarter was at $44 million, barely ahead of $43 million last year. That’s where you start to see the trickle-down weakness that leads to that negative cash flow number.
Streaming Matters
These are otherwise good numbers, and they come with good overall growth in global streaming.
Total streaming revenues are growing year over year, and revenues are also growing sequentially in both U.S. and International segments.
U.S. streaming contribution profit rose from $173 million to $257 million and total streaming contribution profit rose from $127 million to $203 million. However, international streaming continues to lose money, with the segment’s loss widening from $57 million to $79 million. Netflix promises it will be profitable by 2017.
It better be, because the higher-margin DVD business is slowly eroding, with the loss of a million DVD members to 5.668 million, and contribution profit falling from $110 million last year to $90.9 million this year.
Meanwhile, interest expense rose from $29.3 million to $50.2 million, another reason for negative cash flow.
In the broadest sense, Netflix adds subscribers and generates revenue, but it essentially makes no real money. Profit does not translate into free cash flow.
Of course, Netflix has $1.6 billion in cash, so negative cash flow doesn’t mean much now. One does wonder, however, how it will meet its $9.5 billion in content obligations.
I think Netflix does a great job of providing original programming that is provocative and interesting. Alas, it doesn’t do a great job of telling us AT ALL about how many people actually watch that content. With HBO about to move its programming into a streaming service, Netflix will now have competition, even as programming content begins to fall off its service as contracts come due.
Now, can someone explain to me why NFLX stock trades at a market cap of $24 billion on a mere $227 in net income and NEGATIVE free cash flow? That’s a P/E ratio of 120, for those keeping score.
All I can say is I’m not touching this stock at these levels. Feel free to trade it to your heart’s content, but as an investment, you are playing with fire.
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