Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

How long can Netflix keep growing?

Netflix’s (NASDAQ: NFLX) extraordinary run of growth shows no sign of slowing down. The video streaming service’s revenue grew by $384 million during the first quarter of 2016.

The latest earnings report shows us that Netflix added $1.356 billion in revenue over the past year. The company reported revenues of $7.16 billion this March, and $5.808 billion last March. The financial numbers also indicate that Netflix’s revenue has been growing for every quarter since June 2011.

Naturally value investors will want to know if Netflix is actually making money or generating float off of that revenue. Not necessarily; Netflix’s net income fell by $110.78 million during 2015, the company reported $237.38 million in March 2015 and $126.6 million a year later. The net income was actually lower than in March 2014 when it reported a number of $162.83 million.

Netflix is losing Money

It looks as if all the money that Netflix is spending on programming may not be paying off. The company is increasing its market share but the additional customers are not adding any float. Netflix reported a free cash flow of -$237.02 million for the first quarter of 2016.


That was the lowest number yet, its worse than March 2012 when Netflix reported a free cash flow of $815,000. The numbers show us that the more revenue Netflix generates – the more money it seems to lose.

Netflix reported losing -$850.65 million in cash from operations during the first quarter of 2016. That’s an increase of $703.39 million over March 2015 when Netflix reported an operating loss of -$147.26 million. With numbers like that I have to wonder how this company can avoid the death spiral.

Although Netflix does have a lot of float – for now, the company reported having $2.072 billion in cash and short-term investments on March 31, 2016. That figure was lower than March 2015 when Netflix reported having $2.958 billion in the bank.

Netflix is not making Any Money

The obvious conclusion that we can make here is that Netflix is not making any money. Its revenue keeps growing and growing, but its income keeps shrinking and its losses keep grossing.

Why is such a rapidly expanding company with a popular product not making any money? My guess would be that any money that Netflix makes goes right out the door. It has to pay companies like Disney (NYSE: DIS) for the content it sells.

Disney makes the money, while Netflix has all the expense of distributing the product. All Netflix appears to be doing is running a distribution system for other entertainment companies. One has to wonder how long this can go on. There’s no way Netflix can keep it up with $850 million operating losses.


Something will have to change; either Netflix will have to charge suppliers more for distributing their products, or increase the fees customers pay. Either of those moves could cost Netflix market share.

Can Netflix Survive?

So can Netflix survive, I would yes, but not as an independent company; the only real future Netflix has would be as part of a larger organization. Like satellite TV companies such as Direct TV; which is now part of ATT (NYSE: T), Netflix will end up as a subsidiary of a larger company.

The only reason that has not happened is Netflix’s ridiculously high share price, which is starting to fall. On April 21, 2016, Netflix was trading at $95.61 a share; as recently as December 4, 2015, – it was trading at $130.93 a share.

My prediction is that the share price collapse at Netflix will continue and drive this company closer to the death spiral. I also predict it will get acquired fairly soon. Some logical companies to try for Netflix include John Malone’s Liberty Media (NASDAQ: LSXMA); which made a similar acquisition with its reorganization of Sirius XM Holdings (NASDAQ: SIRI) a while back, Disney and cable companies such as Comcast (NASDAQ: CMCSA).

The situation at Netflix shows us that investors who want to make money from entertain should look into creators like Disney and stay away from the distributors. There simply is no cash in streaming video, and there may not be for some time to come.