Netflix Tops 100 Million Subscribers, But Can Its Spending Spree Continue?

An “unmatched international leisure platform.”

That is what Wall Road has to say about Netflix Inc. (Nasdaq: NFLX) after the corporate’s second-quarter earnings launch. The sentiment was shortly adopted by further reward, with analysts noting that “few rivals are positioned to match” the corporate’s place available in the market.

That is appreciable reward for a corporation that was as soon as among the many most shorted and derided on Wall Road.

It begs the query: What motive may Wall Road have for this alteration of coronary heart?

Properly… there are 5.2 million causes, to be exact. In its second-quarter earnings report, Netflix stated it added 5.2 million subscribers worldwide, blowing previous consensus estimates for subscriber provides of about three.2 million.

Whereas many analysts are attributing Netflix’s progress to widespread authentic programming, roughly four.14 million of these new subscribers have been worldwide – which, till lately, was an enormous untapped market.

However whereas there’s nonetheless room for appreciable progress abroad at the same time as Netflix tops 100 million international subscribers, traders are left with a serious query: Can progress proceed to outpace the corporate’s money burn?

Apples and Oranges

If you happen to look previous all of the gushing headlines, you will discover that Netflix burned via $2.1 billion through the second quarter, because it spent closely on authentic content material. What’s extra, the corporate is on tempo to spend about $13 billion over the following three years. That is greater than the annual gross home product of some nations.

To place the market’s euphoria in a extra applicable setting, Netflix burned via additional cash within the final quarter than Tesla Inc. (Nasdaq: TSLA) did within the first quarter – about $1.6 billion. And that was making automobiles, not motion pictures and TV reveals.

And the prices are solely going to rise from right here. Based on Bloomberg, Netflix has seen free money stream flip damaging previously three years… and the burn seems to be accelerating. The truth is, the corporate is contractually obligated for $15.7 billion within the subsequent few years, and roughly half of that quantity would not seem on Netflix’s stability sheet. The truth is, most of the identical allegations levied towards Tesla apply to Netflix’s cash-flow scenario.

Alongside these traces, Wall Road seems to be treating Netflix’s money scenario extra like Amazon.com Inc. (Nasdaq: AMZN) than Tesla. For years, analysts derided Amazon for not displaying a revenue, as the corporate selected as an alternative to burn via money by reinvesting it in progress and new merchandise. Netflix finds itself in a really comparable scenario, albeit with a lot better margins. The underside line is that so long as the outcomes preserve pouring in – i.e., spectacular subscriber progress – the NFLX machine will preserve chugging increased.

And with a nonetheless largely untapped worldwide market, there’s little motive to doubt Netflix as an funding for now.

Investing in Netflix

With regards to investing in NFLX, do not chase the rally! The truth is, when you’re a short-term dealer, now could also be a superb time to fade Netflix’s earnings response. The shares surged roughly 13% within the wake of the corporate’s quarterly report, hitting an all-time excessive within the course of. If you happen to’re already in NFLX inventory, that is good for you.

However NFLX has outstripped assist at its 20- and 50-day shifting averages and is on the verge of overbought territory. The scenario is similar to what occurred the final time Netflix reported earnings, and the shares suffered a notable correction within the following week.

In brief, you have not missed the rally, and there might be higher alternatives so as to add NFLX to your portfolio within the coming weeks.

Joseph Hargett is the assistant managing editor for Banyan Hill Publishing, the place he contributes to the Sovereign Investor Every day. You’ll be able to click on right here to learn extra.