Fans of trending Netflix show “Stranger Things” started the month of July at the edge of their seats
as they anticipated the latest season’s release on 4th of July.
The release has since exploded with popularity and countless internet memes surrounding the series have even popped up.
While it all seems like it’s fun and games for Netflix to be running so many of successful series at the moment,
a peak behind their curtains, however, did not reveal a sight as pretty as what was painted on the surface.
Just last week, the company released their Q2 shareholder letter and reported nearly 50% miss on their projected paid subscriber growth of 5 million.
This resulted in a 10% share price plunge on Thursday alone as shareholders dump their shares in disappointment.
According to Netflix, the target miss was due to Q2’s content which attracted a lot less viewers than they’d expected
and also an unexpected pull-forward effect in Q1 as their results were much better then.
On top of that, the media service provider has also recently hiked its subscription fees, which evidently has put off a lot of subscribers and in turn, affected the total number of subscribers.
While the company is convinced that Q2’s results is simply a minor setback, a deeper look into the industry’s current landscape and the company’s books is reflecting otherwise.
STIFF COMPETITION AHEAD
In the past few years, it seems like Netflix has been dominating the media service business.
Apart from their original series, we have also seen a stream popular content that are licensed from other companies like “Friends” or “The Office”.
This, unfortunately, will no longer be the case very soon and they could be looking at a bumpy ride ahead.
Seeing as how successful Netflix’s business model was, naturally, a line-up of competitors is following suit.
Not only will they be having a face-off with new players like Tubi, Viacom and Overtime, the big guys like YouTube, HBO, NBC, Apple and Disney will also be throwing their hats into the ring.
Just recently, Netflix has announced that they will be pulling popular sitcom “Friends” off their shelves in 2020
and it was already speculated that the license will go to WarnerMedia’s upcoming streaming service HBO Max.
And this could only be the first of many licensed content getting pulled of their shelves.
While Netflix maintained that, with their licensed content being taken off the shelves, more budget will be available for original content,
it is undeniable that licensed ones HAVE in fact, given them a certain booster over the years.
On top of that, with the cluster of new streaming services coming up, Netflix will also be getting a new layer of competition as those peers will certainly not shy away from creating original content themselves.
DEBT FUELLED BUSINESS
Naturally, after looking at all the news,
the WealthPark team couldn’t help but to open the WealthPark app to see how investor-friendly Netflix is at the moment.
What made our hearts sank though, was the WP Rating.
Netflix relies heavily on external capital to fund their business
and a quick look into their cash flow statement shows that they have been consistently issuing massive debt over the past 6 years.
In fact, in the past 4 years, the debt has been in the billions.
A healthy business doesn’t usually need to do this, and this can only signal a red flag in the business.
On top of that, their cash from operations has also been in the negative for the past 4 years and affected their quality of earnings.
From where we are standing, it seems like Netflix is a debt-funded business and could potentially pose risks for investors.
While it is understandable that licensing doesn’t come cheap and this could just be part and parcel of their business model,
it is certainly not one for investors who crave a good night sleep.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author(s) involved in the writing of this piece do not have current vested interest of the company. Please consult a competent professional for expert financial, or other assistance or legal advice.