Despite the recent rosy announcement that Netflix now has a presence in 130 countries, investors would be wise to consider massive cultural roadblocks that will prevent Netflix from ever achieving international success. When these are taken into account, the fact that Netflix stock trades at over 300 times earnings should terrify anyone holding the stock. Valuation alone should cause one to sell, but believing that Netflix is some global streaming powerhouse, or will ever become one, should be the nail in the coffin.
I previously discussed the company’s challenges in China. To reiterate:
· China has its own film industry, because Chinese like to see Chinese faces, Chinese characters, Chinese values, and Chinese stories.
· All foreign films go through the censors. Netflix cannot ask studios to make cuts to movies already released into the streaming markets.
· Disney did a deal with Alibaba, and not Netflix, to stream content in China. Alibaba is China’s favorite son, and is the gatekeeper to streaming content there.
What I didn’t discuss was Netflix’s challenges in the rest of the world. CEO Reed Hastings, in regards to having now entered all the countries it intends to enter (save China), “Today's launch is like having a baby: It's a big deal, but the real work is the next 20 years," he said. "The real work is to become as popular in Vietnam, Thailand and Brazil as we are in the U.S."
This will never happen, for two reasons.
The first reason is cultural. With the possible exception of the UK, Canada, and Australia, the rest of the world does not consume streaming content the way Americans do. Nobody stays home to watch Netflix. That’s because Europeans, Israelis, Latinos, and most other cultures have a societal imperative to be around other people in their free time.
Europe, for example, is all about the café culture. That’s what people do in their spare time. They go to any of the zillions of cafés and socialize. Sure, some people watch Netflix and YouTube, but this is the exception as opposed to the rule. Netflix is not a cultural juggernaut.
Nor does American content play well overseas. Head over to boxofficemojo.com. Enter the name of any non-action film that was a hit in the US. Now notice the international box office. Case closed. Other cultures aren’t crazy about our content.
The second reason is that I don’t believe Netflix will be around in twenty years. Financially, the company is in bad shape. NFLX made $162 million during the trailing twelve months. NFLX stock is burning cash, with negative free cash flow of $500 million over the same period. Domestic streaming growth is slowing down. International streaming, despite having 23.9 million subscribers and charging an average of $22 per month, is still losing money.
NFLX stock will have to raise prices on consumers and raise more capital, either burdening it with more interest payments, or diluting shareholders with equity.
So in effect, NFLX just announced that it will be losing even more money as it expands internationally. Yet nobody wants to admit this.
Meanwhile, the most successful investor in history – Carl Icahn – sold out his entire position last year. Do you want to be on the other side of an Icahn trade?
NFLX stock is selling at over 300x this past year’s earnings, and earnings are going to be worse in 2016 than in 2015. The company is burning cash. NFLX stock is held up entirely on hype.
Enjoy the service, but sell the stock before you find yourself holding the bag.