Business 180 million subscribers and huge debt

180 million subscribers and huge debt

Netflix this week presented results, with the confinement due to COVID-19 growing its subscribers in a massive way. In total, during the first quarter of the year, its number of subscribers grew by 15.8 million, the largest increase in its history, which doubled the 7.5 million growth it had planned. It now has 183 million subscribers worldwide.

Its actions during this month, in the midst of the economic crisis due to the pandemic, had also skyrocketed, going from the 340 dollars to the current 426, even surpassing Disney in market value. However, the announcement of results did not produce another significant increase -only an additional 1 %- and it is that as he himself admitted Reed hastings In the letter to its investors, this exponential growth may only be transitory due to confinement.

And it is that until now Netflix has sustained its growth based on a formula that for some analysts was beginning to accuse fatigue: Invest all the income and even more generating debt to create new content that is fueling your enormous wheel of subscriber acquisition.

These are some of the most important data from the results of the first quarter that Netflix has released and that should be taken into account to analyze whether the company is closer to maintaining its formula of continuing to burn money, or is on the way to being a cost effectiveness:

  • Increase of 15.8 million subscribers, double that of the forecasts.
  • Net profit of $ 709 million, more than double over last year.
  • Positive cash flow for the first time since 2011: 162 million compared to -460 in Q1 2019.
  • He only invested $ 503,000 in marketing, the lowest amount in two years.
  • A long-term debt of 14,170 million, 600 less than the previous quarter but more than double than two years ago.

Go into debt to create more and more content as a way of life

The Netflix accounts so far could be summarized in which your ceaseless sum of users and their benefits have always been reinvested in getting even more new users, something that in recent years it has achieved with its international expansion and borrowing to generate its own content, once the premiere of Disney Plus and other operators pointed out that they were going to stop serving third party content little by little.

Thus the things, Netflix has so far relied for this boost on rounds of financing and debt.. In 2020, for example, it had already accumulated a debt of 20,000 million, and this Wednesday with the results it was announced that it would do so in another 1,000.

The business here is simple. Netflix takes that money, creates its productions, and gets more subscribers. But there you have run into a problem. As seen in this analysis of Investopedia, the international expansion has caused that its subscriptions are less and less profitable, especially in expanding countries -which in the end has caused that in many countries such as Spain they are gradually increasing their prices-.

All this has caused that until now its cash flow It has been negative since 2011, up to this quarter. The cash flow or cash flow represents the liquidity of the company, explained in a non-technical way, what remains in their accounts by subtracting the committed investments, amortizations and other expenses. And this indicator had turned very deep red in the case of Netflix due to its continuous reinvestment formula. Part recovers in the short term – for example, users who are using their free period in the countries where it still offers this formula have not yet entered – but others are more long-term. In 2019 his cash flow ended with -3,274 million dollars, which made the company publicly intend to cut it.

Now in this first quarter that sum has gone from negative to positive (+162 million compared to -460 in Q1 2019). Magically? No, surely it had a lot to do with the stoppage of the filming and therefore of the investments, although Spencer Neumann, Netflix CFO, denied the major in the conference with shareholders.

“To be clear, I want to say that we would have had a positive cash flow without recent COVID events,” said Neumann, who nonetheless admitted that by 2020 the company’s forecast was for this indicator to continue to be negative. “As production increases, that cash outlay will increase again.”he explained. “We continue to have several years to go to get a full positive year, but 2019 will continue to be our most negative year.”

The long-term formula therefore seems clear: Netflix continues to borrow to invest until the number of subscribers is sufficient so you don’t have to ask for money. The question is, When will that moment come?

All pending the pandemic and the ‘streaming wars’

Because what is clear is that so far your long haul debt -that one that fails to replace in a year, and that is caused above all by large investments in content- has not stopped increasing.

Netflix app
Image: Luis del Barco.

Now is how we saw 14,000 million, when in 2015 it was less than 5,000. “Netflix can sustain these levels of indebtedness thanks to its valuation in the stock market and the prospects that it has a real plan,” says Nicholas Rossolillo, analyst and manager of an investment fund in which Netflix has a fundamental role.

With that money, the platform has been paying its exponential bet – and necessary due to the new players – to generate its own, increasingly expensive content. After investing 8,000 million in 2015 on their Netflix Originals, in 2020 the forecasts is that it would do it for a value of 17,000 million, according to Variety. A bet with everything from the company, which now has its eyes on markets like India, where it has projected up to 400 million to create its own successes of Bollywood.

Only time will tell if Netflix achieves its goal and leaves aside his debt stage or if, on the contrary, at some point he begins to notice the punctures of something like that. What Hastings did make clear in his letter to investors is that “we do not want to make prophecies” about 2020, given that this upturn in subscribers could be lost when the confinement ends, which would make their numbers green in terms of cash flow and debt turned red and were only a temporary mirage.

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