Why Netflix May Not Actually Benefit From All This
Netflix is seemingly seeing a temporary boost in usage and a recovery in stock price amid the coronavirus outbreak as much of the U.S. and world population is working from home, locked down, quarantined, or finding themselves with more free time on hand as traditional venues of entertainment such as theaters, restaurants, and other venues are shutdown.
I express caution however if this boost is a secular trend or merely a temporary one that may fade quickly once the world is set to go back to work - as well as the wrenches that may find increasingly be detrimental to Netflix even if this coronavirus crisis is prolonged in the form of content production disruption.
Even Pre-Pandemic Netflix Was Under Strain
Many companies find themselves experiencing surges in business from the unusual parameters set since this past month by the coronavirus pandemic. Everything including delivery services, delivery-oriented restaurant chains, grocery and retail stores, and tech companies with strong remote-supportive services are experiencing not just cushioned declines but actual boosts.
For many of these companies the surge in cash flow is material, and same for the oft-cash-deprived Netflix, and some of these companies may actually be getting market penetration and consumer buy-in that will materialize in potential new long-term business gain.
Prior to this crisis Netflix was already grunting under the strain of the fierce competition from the now extremely crowded content streaming sector as everyone from Disney to Facebook to Walmart jumped in. Many of these competitor services tried to offer their own unique niche and thus to take away from Netflix's long-standing position as a generic "all-in-one" content streaming platform. As shown below Netflix's U.S. growth rate had already been derailed seemingly by all this new competition as a mere 420,000 new U.S. memberships is paltry compared to the big growth achievements and hopes of Netflix's past.
(Source: Netflix Q4 2019 Earnings Letter)
Netflix undoubtedly is experiencing a significant uptick in usage amid the coronavirus pandemic as it has had to even reduce its normal video quality to handle the sheer amount of traffic it is getting. It is unclear how much of this usage is actual paid memberships however versus free trials and if curious consumers suddenly stuck at home will keep on utilizing Netflix in particular after the lockdowns subside or if they find a competitor better for them.
The uncertainty if consumers will stick to the platform exposes precisely the big problem for Netflix right now amid a crowded field of competitors chipping away at its growth and subscriber base - content production. One of the reasons the rise of Disney's "Disney+" streaming platform is because previously much of said Disney content was a major component of Netflix's content library and thus subscriber draw.
Production Halts Means Netflix's Content Is Drying Up
With the content gone that means that Netflix is increasingly left to compete in a high-priced, squeezed content-licensing market as new productions are being halted for much theatrical and television content out there due to coronavirus safety concerns. Netflix is no exception as it has halted all its own productions, rightly given the circumstances but nonetheless detrimental to its longer-term business view. Given the pull of content by previous content suppliers Netflix had been increasingly reliant on its own self-produced, and expensive, "Netflix Originals" content, whose now future is put into serious jeopardy with production totally halted. Other platforms may not experience such a dearth as for example Disney has decades of content in its library and Facebook Watch can and is continuing to provide new content generation even with people isolated in their homes.
(Source: Variety)
On December 31, 2019 Netflix had $5.043 billion in cash and equivalents on hand, significantly higher than its $3.812 billion on December 31, 2018. Yet this is not from positive cash flow as its cash burn in 2019 had increased to -$3.274 billion, up from -$3.019 billion in 2018, with much of that increased burn coming from the cost of additions to streaming content assets increasing from -$13.043 billion to -$13.916 billion. Netflix increases its cash stores through heavy continual and frequent debt-raising, with long-term debt at the end of 2019 increasing to $14.759 billion from $10.360 billion.
Cash Is Now King And Netflix Is No Exception
These numbers all paint a stark picture of the worry for Netflix being that it may see a momentary boost in subscriptions, and thus cash flow, but if this pandemic drags on it will see fewer new content productions being released and thus perhaps suffer increased subscriber losses to its competitors or even further reduced subscription growth as consumers find new content of interest dries up. If this becomes apparent to consumers too quick Netflix may not even see a significant boost in paid memberships as conversions from free trials to paid subscriptions falters.
Given the current corporate credit crunch Netflix's key-method of financing its cash-flow burning operations, already before the coronavirus crisis consistently in the world of junk bonds, may too see a tightening that strains its ability to raise cash at acceptable rates.
These are all serious worries for Netflix that belie the idea that just because people are at home with more time and opportunity for using Netflix that it necessarily translates to long-run boosts to the business or makes up for the other serious issues coronavirus is causing in Netflix's current business model.
Disclaimer: These are only my opinions and do not constitute investment advice.