Two months ago Netflix (NFLX) raised about $2 billion in bonds - securing some financial stability for the foreseeable future.
Though I have no dog in the hunt, I have numerous concerns and continue to avoid the shares.
Netflix's recent quarter was great but here are a few problems (for anyone willing to look for some):
* Fundamentals: This morning Sun Trust is saying that fourth quarter sub ads are trending below expectations.
* Valuation: The company's market cap is now over $180 billion. This is almost at the level of Disney (DIS) , which has 10x the cash flow. The EBITD multiple is over 100x trailing 12-month EBITD.
* Content Spending: Content assets increased well more than $3 billion in one quarter! One could look at content on the balance sheet like a retailer's inventory. It doesn't improve with age. Eventually it will have to go through the income statement.
* Marketing spending: Up 39% and growing faster than sales. No scale economies so far.
* Foreign subs are not domestic subs: Most costs are in dollars and there is risk if the U.S. dollar strengthens. An Indian sub is not equal to one in Indiana.
* Soaring interest expenses: Up 77% in the most recent quarter as net debt has soared to over $5 billion. Cash flow cover of gross interest is under 6x. Why use debt rather than (almost) free equity?
* Increasing competition: Disney, AT&T (T) , Amazon (AMZN) (also cash flow not required). The loss of children's content from Disney should really sting.
(Disney and Amazon are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells DIS or AMZN? Learn more now.)
(This commentary originally appeared on Real Money Pro on Jan. 2. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)
