In this segment from Industry Focus: Consumer Goods, the team considers some of the risks for Netflix (NASDAQ:NFLX) investors as the company deals with negative cash flow, growing debt, and more streaming competition than ever.
A full transcript follows the video.
This video was recorded on Jan. 23, 2018.
Vincent Shen: Alright. Rounding out, now, this discussion of the results, I do want to address some of the risks and challenges that the company might encounter. Management said free cash flow will be negative to the tune of $3 to $4 billion in 2018. Their debt actually just about doubled to $7 billion over the course of 2017. Does any of that ring any alarm bells for you? Or do you think, with the growth the company is seeing, it warrants that kind of spending or a little more risk taking?
Danny Vena: I think we should say, first, that there are no guarantees. There's no such thing as a free ride. What Netflix is doing is counting on subscriber growth and revenue growing faster than when the bills for these originals are going to come due. And so far, they have done that outstandingly. That said, if at any point, Netflix fails to deliver the subscriber growth that they have been delivering, those high numbers, they could run into trouble.
For me personally, I have been following this company since 2007, it's my largest holding by far. In the interest of full disclosure, after today's move, it's back up to 20% of my portfolio. I don't recommend anybody else doing that, but I had a small initial investment in the company 10 years ago and it's grown to that. I don't see a problem. It doesn't ring any alarm bells for me, because they have executed so well, taking this domestic model and translating it to an international model and taking it around the world. I think Netflix is right on the ball with what they're doing. The other thing that's important to mention, and they mentioned this on the call yesterday, is that when they pay for an original, they're paying for it one to three years before that ever airs.
Shen: Yes, I remember management mentioned that a few times as well.
Vena: So they're paying for stuff now that we're not going to see for a couple of years. At any point, if they see subscriber growth slowing, they're going to be able to dial back that spend on original content going forward, and all they have to do is meet their current obligations. So I don't think that's an issue. It's something that bears watching, but they've been able to navigate that successfully so far, so I don't think it's going to be a problem.
Shen: OK. And last thing that I wanted to touch on before we close out here, on the competition front, I want to spend a few minutes just talking about the competitive landscape here. You think about the direct ones like Hulu, Amazon, HBO, there's a bunch of new services incoming in 2018 and beyond. Do you think that might be a headwind for Netflix?
Vena: I think what's happening, and you see this more and more, particularly with millennials, one of the things you're seeing is, they're not signing up for cable packages, they're not watching that much linear TV. Everybody is watching Netflix, you have a lot of people watching Amazon Prime, you have a lot of people watching, as you said, HBO Go, Showtime, CBS All Access, and they're combining services. There was a study not too long ago, and I don't have it in front of me, but I believe it was something like 36% of customers that have video streaming services subscribe to more than one. So I don't think it's going to be a zero-sum game. I think the encroaching competition bears watching, particularly when we're talking about their chief competitors, Amazon Prime and Hulu. But that said, I think the big loser in this trend is going to be linear TV and the cable companies via cord-cutting, people giving up their cable packages. So I think this is basically good for Netflix and the entire streaming industry.
Shen: Yeah. After being the pioneer, as you mentioned earlier, of all these services, jumping in, seeing the growth here, and I think that's really widening the base and the target market for Netflix, among its competitors. And I think that stat about people subscribing to multiple services is very important to keep in mind. It's not a zero-sum game. And with content being the lifeblood of this company, they're obviously investing heavily into that, and staying focused on the quality of that pipeline. The word of mouth, the marketing spending that they're doing, that will all help with their growth and staying one of the leading services, the leading service, in this industry.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon and Netflix. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.