Netflix needs to balance subscriber growth and cash burn

Netflix Inc. (NFLX) stock has been on an upswing lately and touched a new 52-week high of $354.36 on Friday, up 123% from last year. A steady growth in subscriber base has been cited as the primary reason for this growth. So will the streaming entertainment giant be able to keep up this growth?

Netflix fared well in the recent first quarter as earnings came in line with analysts’ expectations. Revenue came in ahead of market consensus, driven by higher subscriber fees. Domestic subscribers base showed little signs of change, and growth came largely from international territories including Latin America and Europe. For the first quarter, Netflix added 1.9 million domestic and 5.5 million overseas subscribers.

In 2018, Netflix expects to spend as much as $8 billion on original and licensed content and is planning to release 700 original series in addition to 80 original movies. This is much higher than Amazon (AMZN) and Hulu in content spending.

For the second quarter, the company expects 6.2 million global net additions with 1.2 million in the US and 5 million for the international segment.

For the first quarter, content payment timing differences lowered the negative free cash flow from last quarter. Due to a rapid increase in original content spend, the company will see negative free cash flow for several more years. And to fund more original content, Netflix will continue to raise debt as needed.

As of March 31, 2018, Netflix used less cash for operating activities when compared to December 31, 2017, and due to purchase of property and equipment, the company used more cash for investing activities. Net cash provided by financing activities plunged 96% due to last quarter’s proceeds from debt issuance.

On recommendation trends, 25 out of 41 analysts are expecting a “strong buy” or “buy” rating, while 14 analysts are predicting a “hold” rating. On growth estimates front, market analysts are expecting a 128% jump during the current year and 61.10% during next year. For the next five years, a 63.27% growth per annum is projected by the consensus.

The future of Netflix is evident from the subscriber growth, but marketing spending and content acquiring remain a major concern.

Zacks Investment Research remains bullish on the company’s stock and expects that continuing subscriber additions and expanding content portfolio are the key catalysts that will help Netflix sustain growth going forward. The near-term profitability will be hurt by rising marketing spend and higher investments in original/acquired content.

On the competition front, Walt Disney (DIS) will be launching its own streaming service in 2019. This move will dispossess Netflix subscribers of various Disney movies, including Zootopia, Moana and The Jungle Book. Through the end of 2019, Netflix subscribers will have access to Disney movies on the service.

The future of Netflix is evident from the subscriber growth, but marketing spending and content acquiring remain a major concern. With 125 million subscribers worldwide, Netflix needs to add more original content to attract more people. This year will be a wait and watch period.