Greenberg: No Hollywood Ending for Netflix?

I’m beginning to think Netflix is a roll-of-the-dice business model: Keep tossing money at it hoping that everything eventually will hit. And maybe it will.


Netflix says it believes the more subscribers it gets, the more it can spend on content. But to get subscribers you need content.

And that takes cash.

But to the critics, the numbers simply don’t add up.

Here’s why (and this is really a short-form explanation):

So far this year, Netflix has committed to spend between $300 million and $400 million on new content, including "Mad Men".

If you just look at their balance sheet and cash flow statements you might say: “Not so bad.”

They have about $350 million in cash and about $230 million in debt.

Even cash flow positive, with reported free cash flow of $82 million.

Here’s the problem: In their 10-K, they disclose $1.3 billion in content obligations spread over a number of years, and that’s before these recent deals.

That gets us to their payables, which have been rising to levels not ever seen: $222.8 million last quarter, up from $92.5 million a year earlier. Another way of looking at it: Payables to revenue are 9.35 percent — the high end of its range; it was 5.2 percent in the fourth quarter of 2009.

Adjust the cash flow to reflect the payables and suddenly cash flow isn’t quite what it appears. Len Brecken of Brecken Capital, who has been short Netflix, says that if 2010 operating cash flow of $276.4 million were adjusted for the ballooning accounts payables it would fall below 2005 levels of $157.5 million.

(And this is before getting into his argument that net income is inflated by artificially low amortization of cash content costs.)

My take: Netflix has done an exceedingly excellent job capturing mind share and market share and building a seemingly unbeatable brand.

Just as Amazon never went away, as early critics expected, neither will Netflix (at least not anytime soon.) But with its stock trading at 82 times trailing earnings— 31 times forward—it ultimately becomes a numbers game. And it would appear the numbers that count (others might call them the real numbers of the cost-of-content versus cash flow) can’t stay upside down forever.

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