Tuesday, July 18, 2017

Netflix Triggers Shareholders’ Pavlovian Response

By Jennifer Saba
July 18, 2017

Netflix has proved again that it has a way of triggering a Pavlovian response from its shareholders. The video-streaming service on Monday unveiled second-quarter results that show it added more subscribers than expected. It also grew operating income faster than revenue. That sent shares soaring, even though expected profitability falls a long way short of being able to justify the stock’s fairy-tale multiple.

The company lead by Reed Hastings blew past subscriber forecasts, racking up more than 1 million net additions in the U.S. and some 4 million additions internationally. All told, Netflix has 103 million customers worldwide. Operating income is forecast to almost double to $204 million during the third quarter compared to the same period last year. That’s on top of growing, at 83 percent, almost three times as fast as the top line in the three months to June. In after-hours trading on Monday, after the results were released, shares shot up some 11 percent.

Yet Netflix burned through $608 million of cash during the second quarter, 44 percent higher than in the prior quarter. It’s expected to set ablaze up to $2.5 billion for the full year and expects free cash flow to be negative for “many years,” it told shareholders on Monday.

Netflix is using the greenbacks to fuel its own content creation - core to its strategy of luring more subscribers. That part, at least, is paying off. It is now picking up more Emmy nominations for its own programs, like “Stranger Things,” than any other media company save for “Game of Thrones” network HBO. Meanwhile, the second quarter may mark the first time that traditional pay-TV providers like Comcast and Charter have as a group lost more than 1 million video subscribers, UBS reckons.

Trouble is, Netflix’s subscriber and awards success is not enough to justify its stock-market valuation. The company currently trades at 36 times estimated consensus earnings for 2020, according to Thomson Reuters data. Yet its expected net margin of 11.5 percent will still run shy of traditional industry heavyweight Twenty-First Century Fox. That suggests investors believe Netflix is set for near-perpetual double-digit revenue growth. That faith, though, seems more a conditioned reaction than logical thinking.

Article Link To Reuters: