Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Kevin Spacey in the acclaimed Netflix series House of Cards.
Kevin Spacey in the acclaimed Netflix series House of Cards.

BREAKINGVIEWS

Rocketing Netflix is burning fuel too fast Add to ...

Reuters Breakingviews delivers agenda-setting financial insight. Its global correspondents react to stories as they develop, delivering sharp and provocative commentary on big financial news as it breaks. Click here to read more international insights.

Will Netflix have a starring role in “The Easter Island Effect”? The Internet video service seems to be using up resources faster than it can produce them. New series like House of Cards lure customers, at a cost. Netflix cash flow remains negative and obligations are rising. It’s starting to evoke the centuries-old Polynesian society that eventually exhausted its means of sustenance.

More Related to this Story

After some strategic missteps, Netflix has pleased the investment gods again. An 18-per-cent rise in revenue in the first quarter from a year ago helped the company’s shares to surge by nearly a quarter, adding $3-billion (U.S.) of market value. The heavily shorted stock has quadrupled from a recent low last July.

The company’s disruption of the entertainment ecosystem also is expanding. Adding another 2.4 million paying U.S. streaming customers – bringing the total to almost 28 million – will be a further catalyst for more services that don’t require a cable or satellite subscription. What’s more, the success of new series like the 13-episode thriller House of Cards and the highly anticipated Arrested Development, made available all at once, are altering behaviour with a binge-viewing option and forcing broadcasters to confront TV’s long-standing linear model. Both trends could threaten carriage and advertising revenue.

The durability of Netflix’s growth, however, is questionable. Free cash flow drained away again, with a $42-million shortfall in the latest quarter. Its balance sheet is also looking increasingly depleted. Include $3.3-billion of off-balance-sheet items, and programming obligations grew from less than $5-billion last year to $5.7-billion.

Moreover, content resources could become more precious. Netflix chief executive officer Reed Hastings said Amazon and Hulu are bidding more aggressively for the same films and programs. Netflix reckons its capital position is just fine, with $1-billion in cash and short-term investments on the balance sheet.

Even so, the inhabitants of Easter Island discovered the hard way the perils of underestimating the shorter-term price of growth. Netflix will need to husband capital or find a way to generate more of it to avoid becoming just a curiosity of financial anthropology.

Follow us on Twitter: @GlobeInvestor

 
Security Price Change
NFLX-Q Netflix Inc. 439.96 1.41
0.322 %
Add to watchlist
Live Discussion of NFLX on StockTwits
More Discussion on NFLX-Q

More Related to this Story

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories