This week media/entertainment/technology giant and bell weather Netflix revealed that it counted an incredible 104 million people from around the globe who are now subscribers of its streaming entertainment services. This subscriber-base number blew away analyst expectations, boosting the stock almost nine percent to reach a new historic high price. It also means that Netflix currently trades at over 200 times its earnings. This is a dire warning sign for investors.
It never makes sense to buy into a business simply because of its impressive customer base or content quality by themselves. Yet an in-depth investigation of the company’s latest quarterly report proves that investors are doing exactly that with this stock (and many others). Netflix is badly bleeding out cash at an alarming rate, despite its record number of subscribers.
Look at the company cash flow statement to get a realistic picture of how the firm is actually doing. This removes all of the accounting acrobatics to prove if the company really made any money. The verdict is alarming as Netflix lost a staggering minus $1.9 billion in operating cash flow during the prior year.
When the costs of capital investments are included in this number, it rises to a negative $2.2 billion in Free Cash Flow. The company must spend this additional money on gaining new content to remain competitive with arch-rivals Amazon, Disney, Facebook, Google, and countless others.
Netflix clearly admits as much. Their Investor Relations site admits that these necessary aggressive investments in content and competitiveness will “continue to weigh on [Free Cash Flow], even after we achieve material global profitability.” In layman’s terms, this means that they will continue to set fire to their cash even as they become massively more successful.
But how can a firm make ends meet when it is continuously losing money while times are good? They simply take out more debt. Their aggregate debt totals increased by an eye-watering 45 percent for only the past three months. Netflix debt now stands at $4.8 billion and counting.
Netflix is far from alone in this respect. Using most any traditional measurement, the largest firms in the country and stock markets are massively overvalued. Take Price to Earnings, Price to Book, Market Capitalization to GDP, or Enterprise value to EBITDA. These metrics all demonstrate that the stock markets are now as high as they have ever been, except before the massive stock market crashes of 1929, 2000, and 2008.
Making matters still more troubling, the VIX Volatility Index (fear gauge) trades at almost all-time lows today. Investors are oblivious and blind to their looming danger of a stock market crash even as the stocks continue to become valued more ridiculously all the time.
American economic fundamentals do not justify such irrational exuberance. Last quarter’s U.S. GDP growth emerged at a stagnant 1.4 percent. Wages are stuck as national productivity is on the decline. Couple this lackluster economic performance with the additional new debt added by the Federal Government in just June, and you have a cocktail recipe for a perfect disaster just waiting to happen.
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