Netflix: Still the Short of the Century

It wasnt that long ago that Netflix (NASDAQ: NFLX ) was destined to become a
category killer. Its disruptive business model of delivering DVDs by mail
coupled with its availability of long tail content became so successful that it
brought down mighty Blockbuster Video. But a funny thing happened on the way
from a stock price of $8 to $300 Netflix itself began to fall apart. Technology
caught up with Netflix then blew past it and along with it came a different
way studios permitted content to be used. Netflix, or anyone else, can purchase
a DVD and rent it out as often as it likes. However, streaming content has to be
licensed . The world started to move toward streaming content, and it still is.
NFLX simply does not have the fiscal resources to license enough material to
remain competitive, much less a category killer. Investors need to understand
that DVDs will be gone within five years, and more likely, three. Just like CDs
have given way to digital files, so will film and television. Netflixs DVD
business will be dead, and it only will be able to rely on streaming and NFLX
at least realized this when it split up its streaming and DVD businesses . The
problem is that streaming licenses are incredibly expensive. Multi-year deals
can cost hundreds of millions and, more likely, billions. Netflix simply does
not have enough cash on hand, and it wont generate enough cash flow from its
current business, to afford the content it needs to stay competitive. Stay
competitive with whom, you might ask? Try Apple (NASDAQ: AAPL ) and Amazon
(NASDAQ: AMZN ). And how long do you think itll be before Google (NASDAQ: GOOG )
gets involved in streaming content? Amazon has $6.3 billion in cash and $1.8
billion in trailing 12-month free cash flow. Google has $34 billion in cash and
$6.9 billion TTM FCF. Apple has $28 billion in cash and $29 billion in TTM FCF.
And Netflix has $350 million in cash and $270 million TTM FCF. Which company do
you think is the odd man out? Even if Netflix could compete, which company do
you think will have the best streaming technology? Best advertising? Best
pricing? If this is starting to sound like a commoditized business, its because
it eventually will lead to just that, which also will squeeze margins. Netflix
wont even be around by then. So, yes, I am not only saying Netflix is a short,
but it is a guaranteed zero in my humble opinion. It wont happen right away, but
it will happen. And there are other things that simply arent helping its case.
Netflixs entire disclosure process is not transparent. Whereas 99% of public
companies release earnings, then hold conference calls and open the field to
questions from analysts, Netflix insists on having questions in advance. It
doesnt disclose exactly how much its streaming content deals are for the media
just takes guesses, and one must look at off-balance sheet obligations to divine
exact amounts. And when you look at those numbers, you realize Netflix has to
come up with an awful lot of cash each and every year going forward to hold onto
those deals. Netflix is a goner. The only question is whether you want to wait
for NFLX to tick back up a bit and then short, or short it now. As of this
writing, Lawrence Meyers did not own a position in any of the aforementioned
stocks. He recently closed out a short position in NFLX at $115, having shorted
it at $252 and $210.