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Netflix, Inc. (NFLX) 2.0: Cash vs. Content

…and the numbers of Netflix

Content and exclusivity can only take us so far before we have to dive into the numbers.

4Q 2011 4Q 2012 Growth/Decrease
Subscriptions (Paid) 20.15 million 25.47 million + 26.4%
Revenue $ 476 million $ 589 million + 23.73%
International Subscriptions 1.45 million 4.89 million + 237.24%
International Revenue $ 29 million $101 million + 248.27%
International Net Profit -$ 60 million -$ 101 million – 68.3%
Free Cash Flow $34 million -$ 51 million – 250%
Cash on Hand $ 798.35 million

Information gathered from Netflix’s 8-Q

Impressive numbers to say the least! With growth numbers like those, it would be easy to get caught up in the hype that Netflix is riding high. But what holds me back from investing are the Free Cash Flow and the International Net Profit numbers. Sure, Netflix needs to invest money overseas to penetrate the emerging markets, but for how long can they take that kind of hit? And it gets worse.

Netflix is slowly slipping back into the “overhyped and overpriced” category again. The P/E for Netflix is 568.28. At that price, people are expecting amazing numbers all the time. The -250% year-over-year cash flow number does throw a wrench into the “growth” story for Netflix. On top of the negative cash flow, the P/E and cash (read: war chest to purchase content) situation is also slightly a scare. See the chart below:

Company P/E Cash on Hand
Netflix (NASDAQ:NFLX) 568.28 $748.08 million
Apple (NASDAQ:AAPL) 10.28 $39.82 billion
Time Warner (NYSE:TWX) 19.14 $3.8 billion
Amazon.com (NASDAQ:AMZN) N/A $11.45 billion

Notice how Netflix’s P/E and Cash on Hand are completely flipped against the competition. Do not get me wrong, $748 million is a sizable amount of money to lock up content deals with studios and even produce a series or two in house; however, Time Warner Inc. (NYSE:TWX) (HBO Go) and Amazon.com, Inc. (NASDAQ:AMZN) (Amazon Instant Video) both have ~5x and ~15x the cash purchasing power, respectively. Both companies have their eyes on the streaming crown. Expect 2013 to be a year of big content deals and potential exclusive content contracts.

The Foolish Line

Who is to say that Netflix won’t climb back up to its 2011 high of $295? It certainly has the potential. A handful of graduated friends who found jobs still stick with the Netflix or Netflix/Hulu combination as the preferred way to watch TV when “they have the time to watch.” I guess Netflix’s potential could be summed up this way:

Is this a quantitative (numbers, ratios) game, or is this a qualitative (content, exclusives, in-house productions) game?

The article Netflix 2.0: Cash vs. Content originally appeared on Fool.com and is written by David Henry.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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