One look at NFLX in the afterhours and one can see the latest and greatest short squeeze in action (courtesy of 14% of the float being short) in a stock which is no stranger to epic moves up as shorts scramble to cover, and just as epic moves to the downside when reality peeks through the hopium clouds every now and then.
After opening at $ 163/share, the stock has been squeezed nearly $ 50 higher and at last check was trading somewhere around $ 210, rising to nearly $ 12 billion in market cap resulting in a P/E multiple of #Ref!, taking it back to a price not seen since early 2011.
What is the apparent catalyst? It’s not revenue: the firm made $ 1.02 billion in sales in Q1, precisely as much as Wall Street expected. It certainly wasn’t the laughable actual (under $ 1 million) or pro forma EPS (from which the company decided to exclude early debt extinghuishment loss costs, but did not exclude the additional debt-associated liquidity on its balance sheet).
What the squeeze appears to be focused on instead, is what took the stock into the stratosphere the last time around just before the management realized it needed to generate some cash as well: rising subscribers, or specifically an increase in total members as of March 31 to 36.3 million, up by 3.05 million in 3 months, and more than some had anticipated.
Of course, this number is just barely higher than the 2.95 million increase in customers the firm generated a year ago and we won’t mention that the rate of increase of international subs – the alleged golden mine for Netflix growth – at 1 million in Q1 2013 was less than the 1.2 million in Q1 2012 and much less than the 1.8 million in Q4 2012.
So congratulations Reed Hastings with the user growth, driven by the free trial period associated with House of Cards, and other original content. We hope you can retain them.
However as there is no free lunch, what is the bottom cash flow line associated with this once again rapid customer expansion? For that we go straight to the company’s own definition of Non-GAAP free cash flow which starts with operating cash flow, removes cash associated with DVD content library acquisitions, removes CapEx and nets out other assets. The result?
And in the company’s own words:
Free Cash Flow of negative $ 42 million was $ 45 million lower than our positive $ 3 million in net income in the quarter primarily due to payments for Originals and non-originals content in excess of the P&L expense, partially offset by the loss on extinguishment of the debt (a financing activity) and non-cash stock compensation expense. The investments that will continue to weigh on our cash flow relative to net income are Originals and non-Originals content (ongoing) and our Open Connect conversion (primarily in 2013).
So we know what is not responsible for the surge in the stocks: the actual cash bottom line. And since the company plans on investing just as heavily in the future into origianl content expect cash to continue to bleed at a pace of $ 40-50 million/quarter or more.
The question then is: once the company hits user saturation, and there are only so many people in the US and globally who will pay $ 7.99 a month to watch its content, original or recycled, how will it upconvert its profitability and start truly making money?
Of course, for the time being this question is irrelevant: NFLX appears to have discovered the magic of the Amazon business model, where the worse the actual bottom line, the better the stock performs.
Then again, this is one movie we have all seen before, and we all know how it ends.
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Here Is Not Why NFLX Is Soaring After Hours
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