Blog Post

Has Netflix overextended itself?

Netflix (s NFLX) agreed to sell $400 million in stock and convertible bonds on Monday in an effort to stockpile some cash. The filings were seen as the latest in a series of bad news for the company by investors, with shares down about five percent. But the raising of short-term funds brings up the question of how well Netflix has been managing its cash, particularly as the company has seen customer additions stall at home while investing heavily to expand internationally.

Netflix has already committed billions of dollars to new streaming deals over the next few years, which would be fine if the company had ample cash in the bank or was still on an outstanding growth trajectory. Netflix finished the third quarter with just $366 million in cash and short-term investments, however, and with $200 million in long-term debt.

The company is hoping to bolster its international business with a planned launch of services in the UK and Ireland in the early part of 2012. So far, Lionsgate, (s lgf) MGM and Miramax are on board for launch in the new market. This move follows Netflix’s international expansion in Canada and Latin America. Those deals are necessary to keep international growth going, but they come at a cost: For each new market Netflix has to pay up front licensing fees for the right to stream titles before it launches there.

Meanwhile, the company has embarked on a series of costly agreements for exclusive content — like two seasons of the upcoming David Fincher-Kevin Spacey project House of Cards and the return of Arrested Development, which will appear only on Netflix. Even when it has signed up catalog titles from content owners like Disney (s DIS) or CBS, (s CBS) Netflix has been rumored to pay in the range of hundreds of millions of dollars for each of those deals. But few have asked how Netflix will fund those additions to its library.

It looks now like Netflix was betting on future domestic growth to help pay for its streaming library. But growth in its home market has stalled, thanks to a series of missteps that included a price hike and the announcement of a new DVD service called Qwikster, which Netflix later backed away from. That’s an unfortunate turn of events that senior management likely didn’t anticipate and one that might have left Netflix in a bit of a cash crunch.

The problem is exacerbated by the fact that Netflix has squandered cash through a series of stock buybacks over the past nine months when it could have been hoarding cash for expansion. Instead, Netflix spent nearly $200 million on buybacks, at an average price of $222 per share — about three times the stock’s current share price.

This could be a temporary bump in the road, but Netflix will have to show some returned growth and financial stability in the fourth quarter if it’s going to get investors back on board. It will also have to show that it can afford to pay the license agreements it signed over the past year, as it has planned aggressive expansion both in new international markets and in its catalog at home.

7 Responses to “Has Netflix overextended itself?”

  1. Travis Henning

    Disclaimer- I love the Netflix service and see great value in it even at $15, $20 or even $25/mo. In part, because of Netflix I have not paid a $60+ cable bill in over 4 years.

    That said, management has made some terrible decisions. Did they not take the DVD spin off or price hikes to any kind of focus group or test the waters at all with the general user? How can it be said that the backlash against them was unexpected? Common sense would dictate that a substantial price increase (40 or 50%) will cause consumers to think twice about the service. I understand the price increases. They are no longer the cute, stealthy media company, particularly in the eyes of the content owners. So now if they want content to stream, they will be paying significantly for it. Personally I don’t have a problem with the increase because the value is there for me, but in this economy, price increases are taboo. Any amount of research would have shown this. The hubris is obviously quite large in the upper ranks of Netflix. Then they thought the Qwikster debacle was a good idea. A short time later they reverse course. A total PR nightmare that may have cost some long term damage to the brand. Clearly the current management is either ignorant or arrogant. Either way, I’m surprised the investors haven’t made moves to oust a few of them.

    • Good point Travis. I feel like people forget that even though Netflix raised prices, they’re still better than the alternative, which is the $60+ cable bill.

      But I also think they’re in a sink or swim moment, and I hope they make it out alive. Like you, I value Netflix. I’m a documentary buff and they’ve been great in delivering that kind of content. So I’m rooting for them, and hopefully this international expansion will be what will help them bounce back. I’m skeptical though, because it rarely works out for a company to grow overseas when things are sucky at home.