Netflix Inc. (NASDAQ:NFLX) smashed market forecasts by adding 5.2 million new subscribers in the second quarter but the company has been haemorrhaging cash as it invests in content to fend off competition.
The video streaming company has been spending about US$6bn a year on TV shows and movies as it faces rising competition from the likes of Amazon.com’s Prime Video and Alphabet's YouTube.
Netflix’s investment in new programming and international expansion has seen free cash flow turn negative in the past three years.
The company warned in its second quarter results that it expects US$2bn to US$2.5bn of negative free cash flow this year, worse than the US$2bn it forecast last quarter. It also sees free cash flow remaining negative for “many years” as it invests in original content.
"We think that free cash flow burn rising from US$(920mln) in 2015 to US$(1.7bn) in 2016 to the new guidance is problematic, and remain unconvinced that Netflix’s content library is sufficiently robust to justify the over US$13bn value reflected on its balance sheet,” said Wedbush.
“As the cost of content continues to be bid up, we expect Netflix to continue to burn cash to fund content acquisition, and management has again acknowledged that this will persist for ‘many years’.”
Wedbush lifts revenue and earnings guidance on Netflix
Wedbush reiterated an ‘underperform’ rating on the stock but raised the target price to US$82 from US$73 to reflect its upgrade to 2017 revenue and earnings forecasts.
The broker lifted its 2017 revenue estimate to US$11.543bn from US$11.305bn and its earnings per share guidance to US$1.21 from US$0.99, on the back of subscriber growth.
Despite negative cash flows, Netflix’s investment paid off in the second quarter thanks to the popularity of such shows as House of Cards and The Crown.
Netflix now has about 104 million subscribers after signing up more international streaming customers.
Netflix revenue boosted by growth in foreign subscriptions
For the first time Neflix has more foreign subscribers than in the US. It has 52.03 million international subscribers compared to 51.92 million in the US.
In the three months to June, the group added 4.1 million monthly subscribers in non-US markets, beating analysts’ estimates of 2.59 million.
In the US, Netflix signed up 1.07 million subscribers, smashing expectations of 631,000.
Revenue rose 32% to US$2.8bn in the second quarter and profits jumped 60% to US$65.6mln.
On the back of foreign growth, the company expects to deliver its first full year profit in the overseas market in 2017.
Netflix faces slowdown in US subscriber growth
Wedbush said the quarterly results beat its estimates on better-than-expected subscriber growth.
“We believe that Netflix will continue to see international subscriber growth and ultimately will see its domestic subscriber growth slow,” the broker said.
“As domestic subscribership approaches an inevitable ceiling, we expect the company to significantly increase its marketing and content spending over the next several quarters in order to maintain the pace of its subscriber growth.”
Netlfix destined to be 'cash burning, high growth' company, says Wedbush
Netflix is unlikely to achieve positive free cash flow for the remainder of this decade, Wedbush added.
Even when it does, the broker thinks positive free cash flow will remain “elusive unless the company decides to materially increase price and sacrifice growth”.
“We are sceptical that Netflix’s ‘Originals’ strategy will achieve critical mass sufficient to drive meaningful profitability over the next several years.
“We think that Netflix is destined to be a cash burning, high growth company until it changes its strategy and accepts its fate as a highly profitable slow growth company.”
Shares surged over 11% on the day in New York