It is now official Netflix (NFLX) now owns American television. Notably, Netflix (NASDAQ: NFLX) brought out 676 hours of original TV in 3rd Quarter 2018.
The streaming service premiered 28 days’ worth of binge watching material in three months, Variety calculates. In addition, Netflix increased its new releases by 50% during 3rd Quarter 2018. To demonstrate, Netflix premiered 452 hours of programming in 2nd Quarter 2018.
Moreover, Netflix believes it has enough viewers for all TV. For instance, Netflix claims it will add 650,000 new subscriptions in the US and 4.35 million international subscribers in 3rd Quarter 2018.
Netflix (NFLX) is now More Popular than Cable and Broadcast TV
Netflix (NFLX) apparently believes that unleashing that torrent of programming is the way to maintain its position as the number one streaming service. For example, Variety estimates Netflix is America’s favorite source for video content.
Cowen & Co. calculates that 27.6% of American consumers picked Netflix as their primary source of video content. Therefore, Netflix is more popular than broadcast TV (only 17.5% of Americans admitted to watching it), and basic cable (just 20.2% of Americans listed it as a main video source).
In addition Netflix is more popular than YouTube, Amazon Prime, and Hulu combined. To explain, Cowen & Co. estimates that 11.6% of Americans list YouTube as their primary video source, additionally, 5% use Amazon Prime Video and 5.6% use Hulu.
Moreover, there are 130 million Netflix subscribers in the world and 56.71 million subscribers in the United States, Statista estimates. Therefore, Netflix is the world’s biggest paid digital video platform.
Interestingly, just 4.6% of Americans believe premium cable is their primary video source. Under these circumstances, Netflix is America’s most popular television network and most influential entertainment brand.
Does Netflix (NFLX) Make Money?
The statistics show Netflix (NFLX) owns television but does it make money?
Currently, the answer is “sort of;” Netflix recorded $3.907 billion in revenues, a gross profit of $1.617 billion, and an operating income of $462.21 million on 30 June 2018. Specifically, Netflix achieved a net income of $384.85 million and a gross margin of 41.39% for 2nd Quarter 2018.
Thus, Netflix is making a little money off its operations. Unfortunately, those operations are not generating any cash.
Notably, Netflix reported a “free cash flow” of -$558.11 million and an operating cash flow of -$518.24 million on 30 June 2018. To make matters worse, Netflix reported a “financing cash flow” of $1.909 billion on 30 June 2018.
These numbers mean that Netflix lost money on its operations and borrowed $1.909 billion in 2nd Quarter 2018. Hence, Netflix is reaffirming the old saying “you can’t make money in show business.”
Why do Investors like Netflix (NFLX)?
The financials raise the interesting question: what do investors see in Netflix (NFLX)? What drove the $333.13 stock price reported on 15 October 2018?
I think most investors are looking at the long-term potential of Netflix. Most likely they believe, Netflix could become a cash-generating machine like Amazon (NASDAQ: AMZN).
Amazon’s financial numbers are like Netflix’s. For example, Amazon recorded a low net income of $2.534 billion on 30 June 2018. However, Amazon recorded revenues of $52.886 billion, a gross profit of $22.254 billion, and a revenue growth rate of 39.34% on the same day. Correspondingly, Netflix recorded a revenue growth rate of 40.27% on 30 June 2018.
I suspect many investors believe Netflix’s platform can generate large amounts of cash just like Amazon’s. Notably, Amazon recorded $27.05 billion in cash and short-term investments on 30 June 2018.
Importantly, Netflix (NFLX) recorded $3.906 billion in cash and equivalents on 30 June 2018. Impressively, that number nearly equaled Netflix’s revenues for 2nd Quarter 2018 which were $3.907 billion.
Why Only Growth Investors will make money from Netflix (NFLX)
Hence, the argument that Netflix (NFLX) could become a cash machine rivaling Amazon is convincing.
Unfortunately, only growth investors betting on the rising value of the stock will make money from Netflix. If it follows Amazon’s example, Netflix will reinvest all of its money in growth and expansion.
Therefore, there will be no dividend at Netflix (NFLX) soon. Instead, Netflix management will follow Jeff Bezos’ lead and accumulate as much cash as possible.
Accumulating cash is a logical strategy for Netflix because the company needs all the capital it can raise. To explain, entertainment is a cash-driven industry.
Why Netflix (NFLX) will not Pay a Dividend anytime soon
Big stars, for example, demand big paychecks and usually get them. Furthermore, major creators; such as big-name producers, writers, and directors, also demand big paychecks.
Netflix will have to write those paychecks. Particularly if it wants “A-list” stars like Robert Downey Jr. to appear in its productions. For instance, Downey reportedly receives a cut of the gross (the film’s profits) for playing Iron Man, The Verdict claims. In addition, Downey also receives a base salary of $5 million to $40 million a film for the role.
Therefore, if Netflix follows Hollywood’s historical script and assembles a huge stable of stars its moneymaking potential will be huge but profits will be limited. The stars and their agents will get most of the money.
A major menace for Netflix will be several superstars operating on Downey’s level and working for the service. Those stars will rake in huge amounts of cash at the expense of NFLX shareholders.
Why Superstars are bad for Netflix (NFLX) shareholders
I predict that Netflix will create its first superstar soon. The superstar will be so popular he or she will demand a Downey-sized paycheck and get it.
Unlike the Hollywood studios of the 1930s, Netflix is not in a position to develop its own star system or freeze out talent demanding big paychecks. Back in the 30s, the studios locked out some overpaid superstars like John Gilbert and Charles Chaplin.
The studios could shut out some stars because they controlled the production, distribution, and exhibition of films in the “Golden Age.” In detail, the same companies owned the movie studios, the distributors, and the theaters. In contrast, such a monopoly is impossible today because of the number of streaming video outlets.
A more likely scenario is big stars triggering bidding wars between various video platforms. For example, an actress could negotiate with Amazon, Hulu, and Netflix at the same time.
Bidding wars for stars are inevitable because new streaming services are coming online. For instance, Time Warner is hiring big-time directors; like Guillermo del Toro and Sam Raimi, for its proposed Quibi streaming service, The Verge reports.
Under these circumstances, the only way to make money from Netflix (NASDAQ: NFLX) stock is to wait for to rise to high prices. Accordingly, Netflix is a risky speculative investment that most investors should avoid.