Max Grigoryev
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Max Grigoryev in Fundamentality,

Is everything that bad for NFLX?

I have NFLX in my watch list for a while, made some profits on shorting them not so long ago. In my previous article about Netflix, I described the fundamental reasons why the stock is significantly overvalued. As you know Netflix announced its earnings yesterday and that's why I decided to check their metrics and fundamentals based on the financials they have. 

Luckily, their financial statement is available online in the Excel format, so basically anyone could download it and do whatever he/she wants. Thanks to investor relations department!


The biggest question I had to Netflix business model whether they are able to increase their margins. If you check the gross profit and gross margins for the last two years, you'll see that Q1 results are worse than the company had last year but in-line with 2014 fiscal year. Gross margin was around 28.5% for the streaming division. 

The problem is in operating income per client. Operating income per client dropped from $2.42 in Q1 last year to $1.08 in Q1 this year, more than two times. Moreover, Netflix has a downtrend in operating income started4 quarters ago, and its operating income per client keeps going down. 

As you can see fro the above table, this downtrend is really obvious and Netflix needs to solve this problem asap. 

Marketing expenses

One positive sign in their earnings report is marketing cost per new client. You can see on the first table that the marketing cost per each new client dropped from $64.93 in Q2 2014 to $37.85 in Q1 2015 to $30.29 in Q1 2016. But even here you can see a treat - according to the stats Q1 has always had the lowest number in marketing expenses per new client. SoI expect that the company will have a significant increase in Q2 and Q3. 

Cash flows

Here you don't even need to calculate anything:

  • Cash flow from operating activities is $229M below zero;
  • Free cash flow is also negative - $261M below zero - 5 consecutive quarters at least.

Yes, Netflix doesn't have a significant debt on its balance, but they always have a content liabilities. As we can see the operating margins are narrowing, the company needs to buy more original content to compete with Amazon Prime, so at some point of time, Netflix will need to borrow money. 

That's the preliminary results of high-level analysis, need to take a deeper look at the numbers, but even now everything doesn't look positive. Let me know what you think about their report.