Friday's 5 per cent jump took Netflix shares to a fresh all-time high, to value the much loved streaming company at $144bn, two-thirds more than at the start of the year.
The people proved wrong are the doubters, those who like Barrons thought its valuation was ridiculous all the way back in August, about $160 ago.
Today, the numbers represent boundless optimism: a dozen times the $12bn of revenues reported last year, 120 times the profits it is expected to generate in this one. Fast forward, and estimates from analysts prepared to put a finger in the air for 2021 average out to forecast revenues of $27bn.
Are they, and the market, wrong?
Maybe it would be easier to share that confidence if Reed Hastings submitted to the sort of quarterly conference call suffered by less exalted chief executives, where questions from the crowd are allowed. The company prefers to pre-record polite conversation with chosen analysts.
It might be easier to believe in the growth story if 48m American households weren't already signed up for the delights of Stranger Things, and marketing spend wasn't growing faster than sales. It will jump to $2bn this year, from $1.3bn in 2017, which suggests winning customers is getting harder even if, like Netflix, we believe 700m households around the world are potential customers.
Buying into the dream would be easier if the company weren't also competing with Amazon, HBO and, in the not too distant future, Disney.
Spending of $8bn on content is planned for 2018. It would be easier to believe such costs were sustainable if the group wasn't funding itself through an accumulation of debt. That borrowing may be the part the market has overlooked, or even got wrong, but it makes Netflix the epitome of the boom we now enjoy.
The company has been burning cash for years, whether we judge it on operating cash flow or free cash flow. Netflix had to find $0.5bn every quarter last year, on the latter basis.
It borrows in the bond market to fund such spending, accumulating $6.5bn in debt, and likes to talk up a ratio of debt-to-market capitalisation as if it measures financial health rather than the weight of fairy dust sprinkled on the stock.
The debt is rated junk, four notches below investment grade. Were credit markets to close, as they periodically do to weaker borrowers in moments of strife, Nextflix would be shut out.
It has $2.8bn of cash on hand, and another $0.5bn credit line, so it could wait out any reluctance by investors to lend. Maturities are evenly spread into the future.
There's a circularity to the confidence game though. On the way up free spending on TV stars, writers, and producers is treated like investment. Stock market fans buy into the story of conquest, while debt investors and rating agencies tell themselves subscriber growth will eventually take care of the lack of cash.
A broader market upset could break that spell. Forced to preserve cash, prompting a slowdown in the pace of growth, and investors might focus more on the burn rate and the company's substantial content liabilities. The group has $7.5bn of these on the balance sheet, and another $10bn of such commitments off it.
In all, contractual commitments come to $28bn, according to this table in the recent 10-K filing:
On top of that are another $3bn to $5bn of estimated commitments for unknown titles in the next three years, for instance “traditional film output deals, or certain TV series license agreements where the number of seasons to be aired is unknown”. Those costs are largely expected to fall due in 2019 and 2020.
Of course, much of these obligations will come under operating costs, and Netflix can reasonably point to large content obligations elsewhere. At the end of last year Disney listed $48bn of commitments, almost all sports related for ESPN, out of $92bn of total commitments.
Set against their respective valuations, Netflix's obligations don't look so bad. With net debt it has an enterprise value of $147bn, to Disney's $182bn.
Traditionalists, however, might prefer some harder numbers. The Mouse empire took in $55bn in sales last year, and produced $9bn of free cash flow.
Focus on the Disney valuation, however, because it gets at the question of what Netflix investors are playing for.
Imagine in a decade Netflix has grown such that it has $55bn in revenues. Also imagine it can grow subscription fees as if they were for a college education, even though it will compete against Amazon, iTunes, Spotify and whatever else comes along for entertainment spend. If the average household were to pay $15 per month, up from $9.43 today, Netflix will need 305m paying households to get there.
It could, sure. We can also argue about details of business structures, predictability of subscriptions and whether Netflix will still be growing.
Yet, if it does everything right from here, what is the upside for enthusiastic shareholders?
A decade of incredible growth would take Netflix to something like the size, heft and cultural influence of Disney today, which the market thinks is only about a quarter more valuable than the TV-streaming trailblazer.
Those feel like the wrong odds.
- No deal Brexit is not a hedge fund conspiracy
- Europe’s digital infrastructure issue
- Let’s give a helping hand to Andrew Yang
- Anatomy of a malware scam
- ARK Invest’s Tesla model gathers dust
- A delirious defence of Uber
- WeLiquid: Adam Neumann pockets $700m
- Yesterday, in efficient markets
- The warm fuzzy feeling of indirectly owning Tencent
- The best of Morgan Stanley's Adam Jonas
- Apple/Tesla: M&A and heartbreak
- Did Beyonce make $300m from Uber's IPO?
- Bitcoin is the 10-year Treasury of our time
- High resolution music is a solution looking for a problem
- Amazon is furious about this negative review
- Missing: $500bn of American savings
- Blockchain for Brexit: a wonderfully terrible idea
- The Bank of Hodlers [sic] (sigh)
- Behind the curtain at China Ding Yi Feng
- An answer to Mark Cuban's question
- Crumbs! It's CRYPTO: the movie!
- National Beverage Corp loses its fizz, and its mind
- Amazon won't spin-off Amazon Web Services
- Mensch! Dan McCrum is innocent, ok?
- Europe's $1 trillion tax gap
- Why online propaganda mobs are an investment red flag
- Davos has produced an amazing new guide on precisely how not to think about risk
- When the public relations industry does PR for itself
- Who wants to be crippled by student debt?
- The bitcoin price is wrong
- The warm fuzzy feeling of Goldman debt
- “Cryptoassets” are crashing again. Is it time to start calling them cryptoliabilities instead?
- Puff the tragic cryptowagon smokes out the Mumsnet demographic
- Don't write off the public sector
- Initiative Q: an elementary pyramid scheme with grandiose ideas [Update]
- Moral investments aren't outperforming
- No one is killing it in crypto (not even Woz)
- Too smooth: the red flag at Patisserie Valerie which was missed
- No, the housing crisis will not be solved by building more homes
- Sorry Civil, 'crypto-economics' and 'constitutions' won't save journalism
- 'Short-termism' isn't a thing, say Fed economists
- Coinbase wants to be “too big to fail”, lol
- Regulation and innovation don't have to be enemies
- Retailers get so lonely around the holidays
- Folli Follie: $1bn of fake sales, and what to learn from the debacle
- The new green evangelism
- Tilray, how low can it go?
- The ICO behind the tragic Everest stunt is now “airdropping” tokens from rockets
- Beware the Hindenburg Omen?
- The broken conversation about financial regulation
- The improbably profitable, loss-making Blue Prism
- The EM rout is not made in America
- Wages and growth and honestly we just give up
- Britain's first blockchain-enabled co-working space isn't blockchain-enabled
- There is a FIRE that never goes out
- The WeWork Garden of Eden
- IQE: lumpy 'Apple' sauce at the pricey Cardiff chip shop
- There's only so much a central bank can do alone
- Eight questions every first-time buyer should ask
- MiFID II: not all doom and gloom
- Tesla: getting to Q3 profitability
- Turkey contagion fears are overblown [Update]
- The chance of an inflation shock may be higher than you think
- Sorry Tim, the humanity is not being drained out of music
- Digital crop circles
- What could go wrong here?
- Sirius Minerals: money for a hole in the ground
- The Bank of England has a strange idea of what QE achieved
- One for the ladies...
- 'Of course, many ridiculous papers appeared'
- Is a change goin' to come?
- The capacity's not there yet (and probably never will be)
- Musk and Tesla are not inseparable
- Libraries, from Carnegie to Bezos
- Crypto & government: from anarchy to amity in the USA
- 'I'm sorry Dave, I'm afraid I cannot sanction this Series B round'
- RBC, through the FANG barrier
- Self-help to buy
- CFA: Chartered crypto analysts -- updated
- The Netflix dilemma -- updated
- Fujitsu's new blockchain offering: really cheap or really expensive?
- Nothing But the Shirt on Your Back
- Universities of Britain: cosying up to crypto is a bad look
- How to make a living in the cult of meritocracy
- Spotify: Drake-oil salesmen
- Oh, the digital humanity
- Sports are not markets, predictions ain't investment
- Spot the difference, Steinhoff edition
- Larry Robbins, a cautionary tale
- The node to serfdom
- Carney is down with the crypto kids
- Samsonite: inventory, excess baggage, and unresolved questions
- It might be a long wait for “the equivalent alternative to ICOs”
- Don't blame it on the sunshine
- In corporate America, brands develop you
- One in ten dollars of US housing were anonymous
- Should AT&T worry more about its debt?
- Who cares if Elon is incinerating capital?
- Let’s not try make 'crypto chicks' a thing
- Tokens all the way down
- Eight-dimensional chess with Elon Musk
- A lopsided trade is a good trade, Italian inflation edition
- How to buy Italian fire insurance
- Atlas bugged
- Inflating inflation
- Crypto's most devout believers are suffering a crisis of faith
- Plus500: past performance is no guide to the future
- Noble rot in a shrinking Harbour
- In defence of ticket touts
- Please don't tell individual investors to buy leveraged loans
- RIB Software: the unicorn rainy-day fund
- Retail is not dead
- Did Soros really give Tesla a “vote of confidence”?
- At a crypto conference in New York, it feels like 2017 all over again
- Egregious expectations - Intelsat edition
- Bitcoin cash is expanding into the void
- Stop getting The Flintstones wrong
- Bond investors do not care if Argentina is solvent in 100 years
- Ubiquiti Networks: of cash and borrowed time
- “We're very disappointed in you, Spotify”
- 'Sex redistribution' and the means of reproduction
- Tesla probably needs to raise capital this year
- No entitlement crisis in America
- Free cash flow to whom?
- Hey crypto bros! Journalism ≠ advertising
- Human capital and the jobs guarantee
- This is a tech bubble, when's the crash?
- The magic of adjustments: ebitla-dee-da
- FUD, inglorious FUD
- A complex analysis reaches same conclusion as simple one: hedge funds suck
- The jobs guarantee and human-capital “nationalisation”
- These hedge fund numbers can't be right
- The Vomiting Camel has escaped from Bitcoin zoo
- Lies, damn lies, and charticles
- The world doesn't need more Elon Musks
- No, Facebook should not become a nonprofit
- Sell all crypto and abandon all blockchain
- Immutable ledgers meet European data protection
- Amazon is not a bubble
- Japan's economic miracle
- Have you ever meta crypto joke you didn't like?
- Delaware should change its rules to let the light in
- Who needs the labels anyway?
- Baby Boomers want your family to finance a larger share of their retirement
- No, America would not benefit from authoritarian central planning
- No one needs to buy Tesla
- How to win a debate in the cult of meritocracy
- Steinhoff International and the case of Pepkor Global Sourcing
- Sorry Jack, Bitcoin will not become the global currency
- The “academic’s cryptocurrency” is an elegant waste of time
- Cigarettes are the vice America needs
- Well that’s one reason to buy yen…
- Musicians, don't just blame the labels for your lack of dough
- Giving stock away to staff doesn't absolve share buybacks
- A penny for Macpherson’s thoughts on the nominal anchor
- Monopoly and its discontents
- A State of Mind
- America is not the least protectionist country in the world
- No Bloomberg, the world's richest people did not lose $114bn...
- Someone is wrong on the internet, government employee pensions and passive investing edition
- Someone is wrong on the internet, possibly fragile
- Someone is wrong on the internet, consumer financial regulation edition
- Someone is wrong on the internet: tontine tokens [Update]
- Someone is wrong on the internet, road economics edition
- Someone is wrong on the internet, wages and the stock market edition