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1 Billion Hours Streaming? People Still Confused.

The following video is part of our "Motley Fool Conversations" series, in which analyst Jim Mueller discusses topics around the investing world.

Netflix CEO Reed Hastings announced that the company delivered more than 1 billion hours of streaming in June. Yet people are still confused over how this company works and how it stacks up against the competition. That adds up to a Messed-Up Expectation, so Jim will be adding shares of Netflix to the real-money portfolio he runs for The Motley Fool. Jim believes it has the potential to be a multibagger over the next several years.

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Jim Mueller owns shares of and Netflix. The Motley Fool owns shares of, Walt Disney, and Netflix. Motley Fool newsletter services recommend, Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (17)

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  • Report this Comment On July 09, 2012, at 5:44 PM, MoneyandPolitics wrote:

    To boil your argument down, you assume that the current content commitment load today will be satisfied by the revenues generated over the next five years. However a glaring flaw in this argument is that the current content commitment load of current is fixed over time. If content is expected to expand in future periods (which I'm sure any subscriber would appreciate) then your premise is incorrect.

    Getting back to the accounting nuts and bolts, NFLX currently has $1.2 billion of content commitments due in the next 12 months that are on balance sheet and another $730 million not on balance sheet for a total of ~$1.9 billion in expected cash outflows associated with content in the next 12 months.

    Given the company's current cash and investments position ($800 million) and the fact that the company is not making money (and further expects losses due to international launch activities in the future) I think investors are rightly concerned about the company's on and off balance sheet content exposure.

  • Report this Comment On July 10, 2012, at 8:52 PM, TMFTortoise wrote:

    Hi MoneyandPolitics,

    Thanks for reading and for your comments.

    Yes, that's my contention. The current contracts are fixed and won't increase in the future. It's future contracts that can increase. Less than $5 billion due over the next five years (again, this won't increase) and expectations of $24 billion in revenue to cover that? No problemo.

    You're also probably right on the next year about $1.9 billion due this year (haven't checked, but I assume your numbers are accurate). Again, it's not current cash that has to pay for it, but revenue over the next 12 months, expected to be over $3 billion. What's the problem?

    The only problem I see is if one of two things happens. First, subscriber counts fall off a cliff such that future revenue no longer covers obligations. Might happen, but the worst that happened in Q3 2011 (after two **major** management gaffes) was a 1.1% decline, which immediately reversed itself in Q4 2011 and after Q1 2012 subscriber count is *higher* than it was before the gaffes.

    Second is that management either overspends what expected revenue can afford (by signing up more expensive content) or the content owners price themselves too high for Netflix.

    Rebutting that argument, Netflix management has been very, very good at forecasting future subscriber counts over the past 6+ years (only 4 qtrs out of 25 have they missed, and none worse than by 3.9%, using midpoint of guidance), thus management knows fairly accurately what future revenue is likely to come in at. Plus, management has a very good handle on what expenses will be over the next few years (mailing costs, streaming costs, salary, rent, etc.), all of which are covered by revenue. Management would be very stupid to overspend expectations in negotiating new content contracts. Sure, they made a couple of gaffes, but that's not the same as saying they're stupid.

    As for the content owners, they *want* Netflix's money (as Netflix writes bigger checks, Hollywood embraces them with bigger hugs) and they know they'll get it (and more in the future because Netflix is spending more as they succeed). It's in their own self interest to be smart enough (except for Starz) not to price their content so high that Netflix refuses to pay. Netflix is in the driver's seat, not the content owners.

    Finally, as can be inferred from my comments above, the current losses or break even are *on purpose* as the company aggressively expands internationally. If Netflix absolutely had to show a profit, it could, by dialing down the content spend on new contracts that begin in the current year. It chooses not to, Wall Street notwithstanding.



  • Report this Comment On July 13, 2012, at 10:07 PM, MoneyTweetzz wrote:

    I don't get why people are surprised by those figures. Netflix is currently the most popular online streaming service and, if you take away the last quarters, it has seen its subscribers grow year after year and will continue to do so in the future. The only risk I see is that if someone overtakes them in that sector. I see Apple try to take a bite off it when their TV will be released. Still $NFLX is a good buy right now.

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