Netflix is raising $2 billion through a note sale to fund its content library, despite the eye-popping figure, not many blinked an eye except one Wall Street analyst; Wedbush's Michael Pachter.
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"Well, it's not slowing and it's gotten worse each of the last six years," Pachter said of the company's cash burn.
"And while I think it's noble of them and laudable of them to say free cash flow burn will improve next year. They haven't said by how much and they haven't said how they're going to get there. So, you know, if this year when the price increase got them to the worst cash burn in the history of the company, 3.5 half billion, what's going to make it improve next year with loss of content and more intense competition? And the answer is maybe they don't have as much to spend on because they're losing Friends and The Office."
He tells FOX Business that Disney, Fox, NBC Universal and Warner Brothers account for 65 percent of all Netflix viewing hours. However, all of that content will disappear from the streaming service by the end of 2021, leaving a big hole to fill.
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Practer warns that the 262 half-hour episodes of Friends, or 130 hours of content, account for about 7 percent of total viewing hours on the platform that will disappear next year. In total, Netlfix will lose about 25 percent of all its views, according to Recode.
In order to fill that gap, Pachter says Netflix will have to make five times as many original shows, and even then the company’s $200 billion valuation is in question.
“I think what they're going to do is print negative three point three billion this year and then print negative 3 billion next year and run a victory lap,” Pachter said. “Except that blows a hole in everybody's valuation because people have it turning cash flow positive literally in two years.”
He added: “Break even in 10 years. How do you value this thing at $200 billion? You just can't. It doesn't make any sense at all.”
Pachter is in the minority when it comes to being bearish on Netflix. Of the 44 analysts who cover the stock, 40 of them have a “hold” rating or higher with an average price target of $362.05 a share.
In April, Netflix rolled out its latest price increase in an effort to help plug the hole left by its cash burn, which reached a record $3 billion in 2018. Netflix says that number will peak in 2020 before turning lower.
Last week, the company reported better-than-expected third-quarter results on revenue that matched expectations, causing analysts up and down Wall Street – but not Pachter – to raise their price targets.
“So that's why I'm a bear because I went to business school at UCLA. We actually learned valuation on a DCF basis. I finished second in my class and I got a 100 in finance and I know how to do DCF in my head and obviously most of my competitors don't do a very good job in evaluating the company,” Pachter said.
“So all of them to a person are making stuff up as they go. And that's fair because we don't have visibility when this company turns positive and we're required by the regulators to have price targets so they slap big price targets on.”
Billionaire Barry Diller, chairman and senior executive of IAC and Expedia, may not be an analyst but he says no one can catch Netflix in the streaming space.
“Disney has such appealing content that I think they’ll do well,” he told FOX Business’ “Mornings with Maria” this month. “Will they ever get to Netflix’s size? I can’t imagine it. It seems incomprehensible to me that that will happen.”
Diller points to Netflix’s global footprint as a reason for his optimism.
“Here’s this company, not very well capitalized that starts in the streaming business and then makes such big bets that they change the entire entertainment business, change the 100-years-old hegemony of these major entertainment companies," Diller added.
“That they’ve done this and then they said right away we’re going worldwide. So they planted their little flags in every place in the world years ago.”
But in Pachter’s mind, that is part of Netflix’s problem.
“Ask yourself how many companies, and I would tell you it's probably two, Coca-Cola and McDonald's, do business in 200 countries. So how many media companies do business in 200 countries? The answer is zero. Right. Why? Because it doesn't f**king make economic sense to be in Belarus and Gabon," he notes.
By comparison, Pachter said that Amazon Prime is in 16 countries and Prime Video in about 24.
“Netflix is doing it solely based on Reed Hastings’ ego because he wanted to say he's in every country,” Pachter said, adding that you can’t make money making content for Estonia and Chechnya. Because of that, he doesn’t think Netflix’s international business will ever turn a profit.
As for when investors will finally wake up to the reality check that he says is coming, Pachter thinks it will take two or three years.
“I honestly don't know when the credit markets are going to shut them down,” he said. “God save them if they lose subscribers. God save them if Disney and Peacock and HBO Max and Apple TV+ are hugely successful. That comes at the expense of Netflix.”
Netflix shares have gained nearly 3 percent this year, trailing the S&P 500’s 20 percent rise.