Shares of Netflix soared today on news the company lost a record $859 million in cash in the third quarter.
Why are investors applauding this egregious destruction of capital?
Well, it’s because investors only look at one number when Netflix reports earnings – subscriber growth.
And on that metric, the company outperformed, adding 6.96 million subscribers, bringing the global total to more than 137 million.
At 137 million subscribers, Netflix has about 2% of the global population as customers.
There are still around 90 million traditional TV accounts in the US (and about 36% of those also have a streaming account).
So there’s definitely room for Netflix to grow in the US and abroad (where the majority of growth is coming today).
But there’s a lot of competition for those new subscribers.
Netflix is up against YouTube (Google), Facebook, Amazon, Apple, Disney, AT&T, Fox… and all of the traditional cable companies that are fighting to maintain subscribers (and testing new offerings to compete with NFLX).
These are companies with DEEP pockets. They also have hundreds of millions of existing subscribers (in Facebook’s case, billions) to market to.
At the very least, all of the other companies in the space are going to drive the cost for programming way up… bringing margins way down.
But let’s not forget the price Netflix is currently paying for that growth…
The company has burned $1.7 billion in cash this year through the third quarter.
So every new subscriber comes at a giant loss.
And Netflix is making up for those losses with debt.
The company has $8.3 billion in long-term debt, up from $6.5 billion at the end of 2017. And it’s paid $291 million in interest so far this year.
With interest rates rising, that interest expense is only going up.
The company has also spent $6.9 billion on content this year (meaning it should surpass its estimates of $7-8 billion). And it’s on the hook to pay out another $18.6 billion for content in the future.
Still, the market values this money-losing, debt-laden and fiscally irresponsible company at $156 billion today.
That’s almost as much as Disney (at $174 billion), a beloved company with a nearly 100-year history that makes billions of dollars in cash every year and, gasp… pays a dividend.
All of the popular companies that are losing money today (Netflix, Uber, Tesla, etc.) are simply a transfer of wealth from investors to customers… because the companies don’t charge enough for their product.
Uber has never turned a profit. But it’s about to go public at $120 billion.
And Tesla is worth more than Honda, despite losing money, missing production deadlines and having a borderline psychotic founder.