Why Netflix is the worst performing stock in the S&P 500
While Reed Hastings, the chairman and co-founder of Netflix, said in a taped presentation April 19 that the company would get through these difficult times, he acknowledged that it needed to think differently. “Those who follow Netflix know that I have been against the complexity of advertising and a big fan of the simplicity of subscription,” he said, in a sort of understatement. “But as much as I’m a fan of that, I’m a bigger fan of consumer choice, and allowing consumers who would like a lower price and tolerate advertising to get what they want makes a lot of sense. So that’s something we’re looking at now. We’re trying to figure it out over the next year or two.
Several years ago, he claimed that Netflix’s most formidable adversary was “sleep.” Society offered so much binge-worthy entertainment that people gave up sleep to watch it. ” We win ! he said then.
Netflix no longer wins. Services like YouTube, Hulu, Amazon Prime, Disney Plus, ESPN+, Apple TV+, Paramount+ and Peacock are coming in full force. “Really, we have great competition,” he said on April 19. “They have some really great shows and movies, and what we need to do is take it up a notch.”
However, throwing money at the problem is no longer the solution. Netflix also acknowledged that with its growth slowing, it needed to “moderate” its spending. It must do this if it is to create sufficient cash flow to support its $14.6 billion indebtedness. The combination of growing debt and insufficient cash was what I warned about in 2018. Today, the company’s balance sheet is in better shape. It paid off $700 million in debt last quarter. And he says he intends to pay for operations, capital expenditures and debt costs from cash he generates himself, making it “positive free cash flow.” ” for an entire calendar year for the first time.
Moody’s rated its debt as below investment grade, or “junk,” while S&P upgraded it to investment grade last year. The company is likely to be “volatile,” Moody’s said April 21, adding that it expects the company to be disciplined in its use of cash.