Is Netflix (NFLX) a Value Investment?

I ask is Netflix (NFLX) a value investment because it meets some classic value criteria.

For instance, Netflix gets 148.46 million people to pay $8.99, $12.99, or $15.99 a month for subscriptions. Thus Netflix is generating a lot of what Warren Buffett calls float.

To explain, float is the difference between a company’s expenses and the amount it collects in subscriptions. Notably, Buffett calls the difference between an insurer’s premiums and claims float.

Will Netflix (NFLX) become a value investment?

Uncle Warren loves float because it is a regular stream of cash a company can tap for a wide variety of purposes. For example, Netflix could borrow against the subscription float, or use the float to finance movie and television production.

Thus float could make Netflix (NFLX) a value investment? However, the financial numbers indicate that Netflix has a long way to go to join the value club.

Specifically, Mr. Market overvalued Netflix (NASDAQ: NFLX) at $358.76 a share on 11 February 2018. However, Netflix has been turning a very healthy profit for some time.

Surprise, Netflix (NFLX) is not making money

In particular, Netflix is generating a very impressive gross profit. For instance, Netflix reports a gross profit of $1.118 billion on revenues of $4.187 billion for 4th Quarter 2018.

In addition, Netflix records an operating income of $215.77 million and a net income of $133.93 million for the same period. This gave gives Netflix a gross margin of 26.69% for 4th Quarter 2018.

However, Netflix is still burning a lot of cash. For example, Netflix reports a negative “free cash flow” of -$1.313 billion, a negative investing cash flow of -$80.36 million and an operating cash flow of -$1.235 billion. Netflix reported the negative cash flows in 4th Quarter 2018.

Hence, Netflix is spending more money than it takes in. Moreover, Netflix is still borrowing like crazy to pay the bills. For instance, Netflix reports a financing cash flow of $2.053 billion for 4th Quarter 2018. Thus, Netflix could have borrowed $2.053 billion in 4th Quarter 2018.

Netflix (NFLX) is Accumulating Cash

On the other hand, Netflix is accumulating impressive amounts of cash. For instance, Netflix reports $3.795 billion in cash and equivalents on December 31, 2018.

Thus, like Amazon (NASDAQ: AMZN) Netflix accumulates large amounts of cash from its platform. Hence, Netflix’s operation is more like a financial institution than a technology or entertainment company. To clarify, Netflix generates large amounts of cash through subscriptions and financing rather than traditional business activities.

Under these circumstances, I think Netflix like Amazon should pay a dividend. Netflix should pay a dividend because of the extra cash it is generating.

However, Netflix is not paying dividend. Instead, I believe Netflix will not pay a dividend for a long time because of its high stock price.

Netflix (NFLX) is growing like a weed

Interestingly, Netflix (NFLX) has something else in common with Amazon it is growing like a weed.

For example, Netflix reports a 27.42% revenue growth rate for 4th Quarter 2019. However, that is the slowest revenue growth rate Netflix has reported for at least eight quarters. Thus, Netflix’s revenue growth could be slowing.

Moreover, Netflix’s subscriber base is growing at an incredible rate. For instance, Statista estimates Netflix added 6.96 million subscribers in 3rd Quarter 2018, alone.

I think this growth is very sustainable because Netflix’s subscriber base grew from around 20 million in 2011 to 148.46 million in 4th Quarter 2018.

Plus, most of Netflix’s subscribers (78.6 million) are outside the United States. Thus I believe Netflix has years and perhaps decades of growth in front of it. Hence, Netflix’s platform could grow at rates similar to Amazon for a long time.

How much can Netflix (NFLX) grow?

Conversely, I do not believe Netflix will ever grow as big as Amazon. However, Netflix does need to grow as big as Amazon to generate large amounts of float.

Thus, I think Netflix is a stock to watch, it is not a value investment today. Yet Netflix could grow into a value investment someday if the company stays on its present trajectory.

In particular, the subscription float could give Netflix the cash it needs to dominate streaming video for a long time. Value investors must watch Netflix carefully because I think it will be a value investment someday.