Netflix Reports Weak Guidance As It Ramps Content Spending

There was extreme anticipation for this quarter because the firm recently announced it would raise prices in the next few months, because it announced “Bird Box” had 80 million views, and because its stock had rallied 51.01% since Christmas Eve.

Personally, I think Netflix somehow fudged the number of people who saw the movie. Maybe it is counting people who watched it for a few seconds. However, this announcement was great marketing because it was reported by the media as fact.

When consumers hear a movie did extremely well, they become motivated to watch the movie to see what the hype is about.

Netflix Beats EPS & Misses Revenue Estimates

Netflix reported EPS of 30 cents which beat estimates for 24 cents. The firm slightly missed revenue estimates as they came it at $4.19 billion instead of $4.21 billion.

It added 1.53 million subscribers domestically which beat estimates for 1.51 million. It also beat international subscriber additions as they were 7.31 million instead of 6.14 million.

As you can see from the table below, contribution profit fell from $688 million in Q3 to $590 million in Q4. EPS fell 66% sequentially and 27% year over year. The contribution margin on international streaming fell from 11% to 3.9%. Q4 revenue was up 28% year over year.

Netflix - Spending To Grow

Netflix is a very unusual company because it is a growth firm with declining earnings. In other words, it is a growth firm without profit growth. The company has been trading off the number of subscriber additions for years, which explains its meteoric rise.

Just because the stock is rallying, doesn’t mean we should ignore the decline in cash flow and the increase in spending. This doesn’t mean you should short the stock, but it’s definitely worth considering this risk factor.

As you can see from the chart below, non-GAAP free cash flow fell to $-1.3 billion. The firm has had negative free cash flow since June 2014. In the long run, investors are betting the firm can raise prices quicker than it grows content costs. To be fair to Netflix, its service is very sticky.

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