Looking in from the outside, you would think that Netflix is printing money, and all is well in the land of the streaming giant.

Well, for those who get their kicks examing the company’s finances, the reality may well be something a little different.

In an article on Forbes, titled “Reality Is Closing In On Netflix”, David Trainer paints a rather worrying picture, saying that investors are losing patience with Netflix’s “extraordinary cash flow burn”.

The company has blown through $13 billion since 2011, and there has been a 4% drop in the stock price after the recent earnings report.

That stock price drop comes as investors realise that subscriber growth alone won’t generate sufficient revenue, and “time is running out for Netflix’s current business model to work”.

Trainer has put Netflix back in the Danger Zone (cue Top Gun music), and outlined some of his reasons:

Netflix [NFLX] needs over 500 million subscribers at $20/month to justify $350/share. Without additional price increases, NFLX needs half the global population to sign up for Netflix…

Investors are signaling that they will not subsidize [sic] Netflix’s huge cash losses forever. They need the company to show it can monetize its content in the face of mounting competition…Debt investors are not happy either. In fact, they’ve always been more skeptical and assigned Netflix’s debt “Junk” ratings since as early as 2015…

The main reason investors are losing confidence is that Netflix’s subscriber growth has not generated enough revenue growth to cover the increase in content spending. Since 2011, revenue has increased by $12.6 billion, which is half the total increase in expenditures over the same time…

The difference in revenue and expenditures means Netflix has burned through nearly $13 billion since 2011. For the Netflix business model to work, subscriber revenue growth has to cover the cost of increased expenditures. To date, the model is not working – not even close.

Then there is the increased competition – Netflix may have been early out of the gates, but other companies are now giving consumers more food for thought.

This below leaves me scratching my head:

Disney has already stated that it plans to end its licensing agreement with Netflix and pull its content by the end of 2019. Furthermore, Warner Media could pull the popular Friends series, which Netflix just paid $100 million to keep on its platform for another year

Who the hell sanctioned Friends for $100 million for one year? Let’s call a spade a spade and just admit that Friends is utter rubbish.

NBC is also threatening to pull The Office (the US version), which would be quite a hit as NBC execs say Netflix has told them the show generates more viewing hours than anything else on the service.

Back to Netflix having to work on revenue streams other than subscriptions:

It’s no secret that Disney is one of the best when it comes to monetizing. Its content can earn revenues through box office, merchandise, licensing deals, theme parks, and soon enough, streaming. With its Disney+ service, the firm will throw its full weight (and massive resources) into the streaming ring. Compared to Netflix, the trajectories of the two firms couldn’t be more reversed.

At Disney, you have a firm that has generated $41 billion in cumulative FCF [Free Cash Flow] since 2011. Its FCF as a percent of revenue has been double digits or higher in each of the past five years, and positive every year since 2011. Meanwhile, Netflix has burned through $13 billion in cumulative FCF since 2011 while FCF as a percent of revenue has been negative each and every year…

In closing, Trainer paints a picture of a company that might be heading for real trouble:

Netflix was the first to stream video content to a mass amount of users. However, just as with AOL, nothing stops competitors from doing the same at equal or cheaper prices. Now, as Netflix raises prices, consumers can look elsewhere to find greater value.

Furthermore, if your only advantage is the ability to spend cash, how do you compete with those that have significantly more cash, such as Apple, Disney, Alphabet (GOOGL), or Amazon (AMZN)? This juxtaposition could explain the rise in analysts voicing skepticism about Netflix while praising the future growth potential for Disney.

Can Netflix consistently provide better content than the rest of the industry for long enough to justify its current valuation? The evidence leads me to believe the answer to this important question is no.

Damn, tell us how you really feel.

Subscribe to whichever streaming subscription service you like, but a gentle reminder that Showmax has a free two-week trial, and is also free to existing DStv subscribers.

[source:forbes]