Have The Problems Caught Up With Netflix?

  • Netflix shares have done nothing since the company did its version of Apple's 7:1 split last July.
  • The stock's momentum relies on constantly-increasing subscriber counts, now mostly overseas.
  • Rivals are on to the growth game, and the company must now show profits.

Netflix (NASDAQ:NFLX) is a charter member of FANG. Facebook Facebook (NASDAQ:FB), Amazon.com Amazon (NASDAQ:AMZN), Netflix and Google the artist now known as Alphabet Inc-A (NASDAQ:GOOGL),  have defined the current decade with their ability to turn cloud into profits.

For its $41.5 billion valuation, Netflix depends entirely on subscriber growth, which caused revenue to double between 2012 and 2015, as it transformed itself into the premium "over the top" entertainment provider. But the posse, in the form of competitors including Amazon - on whose cloud network it still depends for content delivery - is on to the game, and many western markets are becoming saturated.

This does not mean growth is not possible, only that it is slowing and becoming more dependent on markets like China, India, Australia and Europe than before. Those revenues don't translate well in a time of the strong dollar. And as growth slows due to the law of large numbers, Netflix now has to deliver a solid bottom line soon.

That won't happen this quarter. The whisper number on first quarter earnings, due to be reported next month, remains just 4 cents of earnings on $1.97 billion in revenue. That comes to 25% top-line growth, year-upon-year, but only 7% growth from last quarter's $1.82 billion. Matching the number may not be good enough to maintain speculation in the stock.

It is important to repeat that Netflix remains a very expensive stock. The market cap of $45 billion is nearly 7 times revenue. Its margins are wafer thin -- $122 million earned on $6.7 billion in revenue last year. Operating cash flow was negative last year, and debt now represents one-quarter of the balance sheet.

Investors certainly feel the posse is after Netflix, because this is no longer a hot stock. Over the last six months, Netflix is flat, while the S&P 500 is up 7%. The catalog is shrinking, as the company focuses more on exclusive content. Netflix reportedly throttled speed to mobile devices, causing one FCC commissioner to demand an investigation. Netflix faces an ongoing war over “geo-dodging,” users who get around blocks on where they can view content by using Virtual Private Networks, but it’s losing that war.  Netflix remains dependent on one of its competitors, Amazon, to deliver its content to users.

None of these problems is game-changing by itself, but together they indicate that the game has changed. The days of huge subscriber count increases are ending, and investors want to now see how Netflix can increase its Average Revenue Per User beyond the current $8/month before they put more money to work in it.

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