Is Netflix content spending sustainable? | Media Investment | Business
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Netflix reported strong revenue growth in Q4 of 36% year-over-year to $2.477 billion — but has it hit peak growth?

netflix smartThat’s the question investors are mulling as the company reported year-over-year operating income growth of a whopping 156% to $153.9 million. Overall net income increased 54% to $66.7 million, and subscriber growth was also strong, with 10% year-over-year growth in the US and 48% internationally. Total streaming memberships totalled 93.796 million at the end of the year.

The stellar results sent Netflix stock up 5% in the week, but the concern remains about whether that kind of growth trajectory is sustainable. This year, Netflix borrowed another $1 billion, bringing its total long-term debt to $3.364 billion. Servicing that debt now costs the company $43.6 million per quarter.

“The earnings report contained a number of red flags for investors,” said Seeking Alpha analyst Mark Hibben, in a post. “Perhaps the most glaring was the negative free cash flow of $1.660 billion for the year, a dramatic increase of 80% compared to last year's negative $920.6 million.”

According to the cash flow statement, NFLX spent $8.653 billion on new content assets in 2016 (including licences for non-Netflix content as well as Netflix original content), and at the end of the year, it owed $3.632 billion in current content liabilities and $2.894 billion in non-current content liabilities.

“Netflix doesn't make clear how much is money owed for content already produced or licensed and how much of the liability is for future commitments,” Hibben said. “So Netflix could be parking a lot of debt in the form of money owed for content that it hasn't paid yet.”

The issue is that Netflix every year moves older original and licensed content into the non-current content asset category. The appearance of increasing net worth really turns upon the valuation of these current and non-current content assets — and whether operating momentum based on those assets will continue.

“Investors are taking the word of Netflix that these assets really are worth what is claimed,” Hibben explained. “[And] while there may be some doubt about the valuation of the content assets, there can be little doubt about the associated liabilities. These would be calculated based on contractual obligations to pay money owed for content under the terms of the contracts by which the content was acquired, as well as future contractual obligations.”

Netflix is a bit opaque when it comes to the liability mix however, making it difficult to discern whether Netflix is really getting a reasonable return on its investment in original content as well as licensed content.

“The negative free cash flow combined with what may well be overvaluation of content assets should alarm Netflix investors, especially since so much cash flow is going into content acquisition,” Hibben said. “Investors have reason to be cautious, as a pullback could be triggered by any number of circumstances, including lack of subscriber growth or declining net income.”
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