Cash Burn And Chill? Argus Sees Debt In The Future For Netflix

Netflix, Inc. NFLX shares declined 14 percent after market close on July 18 following the disappointing 2Q16 member additions, which missed the already weak guidance.

Argus’ Joseph Bonner reiterated a Hold rating on the company.

Cash Burn

“We expect higher costs for new original productions, content licensing, and international expansion to pressure margins in the near term. The company is also attracting a host of competitors,” Bonner mentioned.

Although the stock has underperformed in 2016, the valuation metrics remain meaningfully higher than peers, on a historical basis.

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Although Netflix’s core strategy is to grow its Internet streaming subscription business, in both the domestic and international markets, the costs associated with the ramp in original productions, international expansion and content licensing is expected to pressure margins at least through 2016.

“The company has a stunning cash burn rate, with a free cash flow deficit of $1 billion over the last 12 months, and will likely need to access the high yield debt market in late 2016 or early 2017,” Bonner stated.

Subscriber Churn

While the price hikes implemented in late 2015 might help margins, the analyst noted management was blaming these price hikes for the increased member churn and the decline in the subscriber base.

Bonner expects the pressure to continue for the next several quarters, as more long-time subscribers are faced with higher monthly rates.

The 2016 EPS estimate has been reduced from $0.31 to $0.28.

At time of writing, Netflix was up 2.67 percent on the day, trading at $88.13.

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