Netflix reported its first decline in U.S. subscribers in more than eight years yesterday, losing 126,000 subscribers while analysts were expecting an increase of 350,000. The stock tanked by more than 10 percent today.
Big Subscriber Loss = Big Valuation Loss
The miss freaked out Netflix investors, lopping $17 billion off Netflix’s still-insane valuation of $141 billion. That translates to a loss of $135,000 per lost domestic subscriber.
Netflix admitted its missed forecast was reflected in all of its regions, but areas that recently experienced price increases saw “slightly” more cancellations.
Back in January, The Diffusion Group released a survey saying that a $1 price increase would cause 8 percent of subscribers to cancel the service while another 8 percent would downgrade to a lower tier.
If this comes to pass, Netflix would lose 4.8 million subscribers, generating a $62.4 million annual revenue loss. More to the point, it would serve as proof that there is a finite limit to the number of streaming services a given U.S. household will maintain at any one time.
Analyst Thinks Netflix Valuation is ‘Bullsh*t’
Michael Nathanson of MoffettNathanson expressed his position very clearly regarding Netflix’s earnings:
“To be clear, we think 10 to 15 year DCF [discounted cash flow] models are interesting, but bullsh*t, and used by the sell side to defend a stock that they want to champion.”
Nathanson had modeled 88 million subscribers by 2025, but last quarter may have changed everything:
“[Looking] at this quarter’s results, that ‘blue sky’ scenario looks downright psychedelic as [the second quarter’s] U.S. subscriber adds turned negative on the back of $1 to $2 price hikes and an underwhelming content slate. This one quarter calls into question many of those 2025 endpoints.”
The stock market has rewarded Netflix with insane valuations exceeding 100x earnings for quite some time, pushing its valuation to over $150 billion while never managing more than $1.2 billion in annual net income (last year).
The Amazing Netflix Cash Burn
Meanwhile, Netflix has also been burning through cash faster than the sailors of every navy in the world on shore leave. It burned through $2 billion in cash in 2017, $3 billion last year, and is on track to burn $3.5 billion this year.
Netflix finances all of its operations at this point using high-yield debt. While it has $5 billion of cash on hand, it has over $12 billion in debt that costs it well over $500 million annually to service.
This hardly means that Netflix is going out of business. However, Netflix will have no choice but to continue to raise prices and in doing so will lose subscribers.
Netflix will also have to face increasing competition. Disney launches its service later this year. Consumers are not going to carry more than two or three services at any one time. With Netflix’s content being hit-or-miss, and new offerings also coming from Apple, Netflix stock seems like its valuation may start to decline further.