Netflix's $300 million deal with Ryan Murphy is 'expensive as opposed to explosive'

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  • Netflix is over investing, says Wedbush Securities analyst Michael Pachter.
  • He believes making the $US300 million investment in Ryan Murphy worth it will be a tall order.
  • Pachter’s price target is 60% below Netflix’s current level because of the company’s negative cash flow.

Netflix is way overvalued, according to Wedbush Securities analyst Michael Pachter. He gives the movie-streaming giant a price target of $US110 a share, some 60% below its current level.

Netflix made a splash on Tuesday, announcing a five-year $US300 million contract with famed “Glee” and “American Horror Story” producer Ryan Murphy, who is currently finishing his deal with 21st Century Fox.

And while the deal was hailed as a win in the entertainment world, Pachter says he doesn’t think it makes sense for Netflix. Pachter told Business Insider the company’s deal with Murphy is “expensive as opposed to explosive,” and that he’s concern about Netflix’s cash-burning tendencies.

Pachter says Netflix is “not investing prudently” and even if Murphy has a 50% success rate the company is “still going to lose money.”

He attributes a large part of Murphy’s success at 21st Century Fox to John Landgraf, the CEO of FX Network and FX Productions. “Does Ted Sarandos have the same skill set?” Pachter said of Netflix’s chief content officer. “I would say no.”

But Netflix was willing to pay a high price for Murphy. “Somebody at Netflix really wanted this guy,” Pachter theorised. “His agent asked for $US300 million and they got him. Could they have gotten Ryan Murphy for $US80 million instead of $US300 million? Maybe. Was there a bidding war? Yes.”

Netflix reported fourth-quarter earnings of $US0.41 a share, but burned through $US1.79 billion of cash due to its big spending on important assets like content. The company is expected to spend $US8 billion on content this year, compared to Apple’s $US1 billion.

“I’m concerned that their reported net income doesn’t accurately reflect their economic situation,” Pachter warned. “Cash burn matters.”

Netflix is able to spend so much money because of its easy access to loans. “They have to keep borrowing to fund their spend,” Pachter said. While the company’s content library becomes more valuable as it grows, he added, “they don’t generate enough cash to pay down debt.”

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