The Fundamental Challenge for Netflix Inc.

In this segment from Motley Fool Money, Chris Hill enlists analysts Matt Argersinger and David Kretzmann to give their takes on a Motley Fool favorite: Netflix (NFLX 0.81%). The streaming video leader's latest report was met with a mild reaction from the market. But its debt and negative cash flow should be concerning to shareholders. The investments the company is making in content are necessary, of course, but how long will it take them to pay off with profitability? 

A full transcript follows the video.

This video was recorded on April 21, 2017.

Chris Hill: Shares of Netflix are down a bit this week after subscriber growth in the first quarter was a little bit lower than expected. That being said, David, this wasn't a bad quarter.

David Kretzmann: No, not a bad quarter. The stock wasn't nearly as volatile after this release as we've seen in previous years, where it pops up or down 20%, and that's a mild reaction from the market. No, this quarter really brought a lot of what Wall Street and the market were expecting. To me, though, Wall Street and the headlines are focusing on the profitability of Netflix. And that's true, to an extent. But you can't ignore the huge up-front cash cost that Netflix is incurring spending this money on original content. Their free cash flow burn is now about $1.7 billion over the past year, and that's increasing. They already have a net debt position of $2 billion, and there's rumors that they're going to bring on another $2 billion in debt in the next couple weeks. So, that signifies a fairly risky investment. That's a huge bet on that original content paying off. And so far, that has been a wise investment. But when you have a company that's burning so much cash and raising a lot of debt, that increases the risk with that investment a good amount.

Matt Argersinger: Yeah, I think it's amazing, because I think Reed Hastings, a few years ago, after one of their good quarters, said, "The cash we're going to be generating in two or three years is going to be amazing." That got investors all excited, and now he's come out and said, "No, we're going to be negative free cash flow for at least the next few years." And I get the strategy, and I think expanding as much as they have and gaining scale and expanding into many more countries in the last years is the right strategy. Just at some point, I think David is right, it's going to catch up with them, the content costs. 

Hill: Although, to the point you made earlier in the show, Matty, they did call out the fact that Netflix subscribers have watched 500 million hours of Adam Sandler movies. And we can laugh about that, as we should, but I think they called that out as a signal to people to say, "We know what our people want. Yeah, we're giving a lot of big checks out to Adam Sandler and Jerry Seinfeld and others, but people are actually watching the stuff, so it's worth paying them for it."

Kretzmann: If you can have that success with Adam Sandler, then the $6 billion they're spending on content this year should be able to go pretty far.