Netflix will report earnings for the third quarter after the market closes on Monday, Oct. 16. The company has been overspending his competitors in recent years and bought a staggering $22 billion in new content since 2014.
While the expansion is crucial to Netflix’s aspiration to build a world-class digital library, Drew Pascarella, lecturer of finance at Cornell SC Johnson College of Business, says investors should focus on the impact of binge-spending on cash flow.
“Netflix’s recent investment is great if you are a customer; you have $22 billion worth of shows and movies to binge-watch. It’s not great if you are a Netflix shareholder, however, because Netflix doesn’t generate enough cash to pay for this binge-spending.
“Over this same period, Netflix has borrowed $4.3 billion to help pay for this new content. This has not solved the problem, however, as analysts expect a cash shortfall of another $4 to $5 billion in the next few years. Netflix has three sources to fund these shortfalls: shareholders, creditors and customers. Recent price increases indicate that, at least in part, Netflix will be asking customers to help pay for their library build-out.
“Large capital – or content – expenditures are not necessarily a bad thing. Spending of this type is generally a sign of a company in an investment phase; spend today, reap the benefits for years to come.
“In the manufacturing sector, companies in an investment phase build a factory today for use over a 10- to 20-year period. But Netflix is different. Customers want brand new content every year. If manufacturing companies needed to build a new factory every year to satisfy their customers, they’d all be out of business.
“The key question is, when will the cash spent on content match up better with the cash they collect from customers? For their shareholders’ sake, I hope the answer is soon.”