- Nathaniel Bell for Netflix
Sure, Netflix is one of the so-called FAANG stocks that are growing quickly and driving much of the stock market’s gains. Its stock has multiplied 69 times on a split-adjusted basis over the past decade. And its monthly streaming service is popular and growing faster than expected.
But content-wise, Netflix is “chiefly a hit-renter, not a hit-owner,” Jack Hough wrote in the August 12 Barron’s cover article. And that, Hough argues, is its biggest weakness.
Here are some of Hough’s key arguments:
- Video is expensive, and Netflix is running low on cash to make or buy blockbusters. Netflix expects its cash burn to total $2 billion to $2.5 billion this year, up from $1.7 billion in 2016. And it’s financing this with a lot of borrowing – it holds $4.8 billion in long-term debt. Disney’s decision to exclude its new content from Netflix starting in 2019 is “troubling.” Netflix’s bids for licensed content would become harder because many content owners have already signed deals with competitors like Hulu. Netflix’s accounting practices – like not categorizing a canceled show as a write-down – may be understating how high the company’s costs are. Netflix isn’t generating enough cash to justify its valuation; it’s trading at 146 times its estimated 2017 earnings, according to Bloomberg.
But Barron’s covers are jokingly called a contrarian indicator in some financial circles, and for good reason. Just look at the magazine’s September 2015 forecast that Alibaba would fall 50% – the stock has surged 135% since that cover.
For what it's worth, Barron's seems to love the 50% thing
— Carl Quintanilla (@carlquintanilla) August 14, 2017
The Barron’s cover was released just before news of a major coup by Netflix. The company poached Shonda Rhimes from ABC Studios after a 15-year relationship that yielded shows including “Scandal” and “Grey’s Anatomy.”