The hidden worries behind Netflix's stock price frenzy

Today, Netflix, the American video streaming company that successfully produced hit dramas such as "House of Cards", announced its first quarter financial report for 2015. The report shows that the company's revenue for the quarter was US$1.4 billion, a year-on-year increase of 31%; net profit was US$24 million, a year-on-year decrease of 55%; diluted earnings per share was US$0.38, compared with US$0.86 in the same period last year.

Netflix's total number of global streaming subscribers reached 62.3 million in the first quarter, with 4.9 million new subscribers, higher than the previous estimate of 4.1 million and higher than 4 million in the same period last year. After-hours stock price surged more than 12%, breaking through the 52-week high and closing at $534.77.

But behind the seemingly carnival, there are huge hidden dangers.

Even before the quarterly financial report was released, the market had been questioning Netflix. The just-released financial report data further confirmed people's concerns: revenue increased by 31%, but net profit fell by 55%, which infers that Netflix's costs have surged again.

Sources: New Constructs, LLC and company filings

Content spending weighs heavily on Netflix's revenue growth

The reasons for the high costs are nothing more than these two points: content expenses are huge and international business is still in the "money-spending period" of development and construction.

Tony Wible, an analyst at Janney Capital Markets, an American investment bank, predicted in a recent report that Netflix's investment in program content will reach $5 billion in 2016, second only to ESPN among all content buyers and exceeding many traditional TV channels. Currently, Amazon's spending in the US video market is about half of Netflix's, but Netflix's user base is 1,250% higher than Amazon's. This proves the importance of scale advantages in the video market.

But the question is how long can Netflix sustain its strategy of spending money on content? Netflix spent $9.5 billion on content for video streaming in 2014, up 30% from 2013, but its revenue only increased by 7% from 2013. This phenomenon has been evident since 2010. In addition to paying content copyright fees, Netflix also needs to pay corresponding license fees to successfully distribute content to users.

In terms of international business, Netflix has entered Cuba, New Zealand, and Australia at the beginning of this year, and will enter Japan this autumn. Just last month, Netflix announced that it would enter China. It seems that Netflix is ​​rapidly expanding its territory and increasing the number of users. But the fact is that in the first quarter of 2015, the profit contributed by Netflix's international online broadcasting business was -65 million US dollars, compared with -35 million US dollars in the same period last year. The contribution profit margin was -15.6%, compared with -13.1% in the same period last year. Of course, some cost factors do come from the impact of the appreciation of the US dollar.

User growth is a good thing, but user growth that comes at such a huge cost must be viewed with caution.

It is difficult to increase revenue and reduce expenditure

Expenses are constantly increasing and costs cannot be reduced. In order to maintain the speed of development, the only way is to increase revenue. Unlike Hulu, which is free for users but charges fees through advertising, Netflix does not have advertising revenue. Therefore, if Netflix wants to increase its revenue, it can only increase the number of users or increase the fee standards.

Netflix's subscription fee was $7.99 per month at first. In May 2014, it rose to $8.99. This is higher than Hulu Plus's monthly price of $7.99, not to mention Hulu, which does not charge a subscription fee. Amazon Prime's price is $99 per year, which is only $8.25 per month. Besides, Amazon Prime has other functions besides watching videos. With competitors pressing aggressively, the possibility of Netflix raising prices in the short term is almost zero.

In essence, no matter how powerful Netflix is, it is just another content platform. The platform competition is even more obvious in China, where cunning users have no loyalty at all and will turn to the platform that has the content they want to watch.

Paul Vogel, an analyst at Barclays, has a "hold" rating on Netflix. "Despite the growth of Netflix's business, we have been struggling with how to price Netflix's shares given its relatively low average profit per customer, its increased content spending, and the company's growing competition around the world," Vogel said. "Increased spending is likely to continue to weigh on Netflix's margins, and we believe that the slow growth of paid subscribers in the U.S. will only provide limited upside to Netflix's current share price."

The valuation is really too high

In addition to Netflix's high expenses and low income, what is worrying is its overly exaggerated valuation. In contrast, Apple's opening price today was $126.56, while Time Warner, which owns CNN, HBO and other TV stations as well as Warner Bros., opened at only $84.64.

In the United States, several stock websites, including Seeking Alpha, have written articles saying that Netflix investors are taking risks as its stock price is soaring. Once the rhythm of the "Great Leap Forward" is disrupted, Netflix's stock price will fall to a freezing point.

The future cash flow discount model shows that at a profit margin of 7.5%, the company's revenue must grow at a compound annual growth rate of 20% to prove that the current market price is correct. This means that the company must maintain annual revenue of $218 billion in the next 20 years. If calculated based on a monthly membership fee of $8.99, Netflix needs about 2.2 billion users to achieve annual revenue of $218 billion. The total population of the United States is only more than 300 million. This shows that the current expectations for Netflix are unrealistic.

“Netflix is ​​still telling a subscriber growth story,” said Paul Sweeney, an analyst at Bloomberg Intelligence. “As long as subscriber growth continues both domestically and internationally, bulls have a case to buy Netflix.”

As of press time, Netflix's stock price was $533, which means that Netflix's market value has reached $28.841 billion.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.