NETFLIX'S BIGGEST BEAR: 'They're in a vicious spiral to the bottom in content spend'

Ernesto S. Ruscio/Getty Images for NetflixNetflix CEO Reed Hastings
  • Netflix‘s disappointing second-quarter earnings results aren’t deterring Wall Street analysts from raising their price targets.
  • WedBush’s Michael Pachter, the biggest Netflix bear on Wall Street, isn’t surprised by the results.
  • The amount of good content on Netflix simply isn’t enough to turn the streaming giant’s cash flow positive any time soon, Pachter said, contrary to the core belief on Wall Street.
  • Watch Netflix trade in real time here.

Ahead of Netflix‘s earnings on Monday, investors didn’t seem to be too worried about what was to come. The stock had been flat to slightly higher on the day, and the streaming giant had largely beat expectations in its first two quarterly reports this year.

But all the things Wall Street wasn’t expecting to happen, happened. Netflix’s journey towards turning free-cash-flow positive – which Goldman Sachs said was at an inflection point – took a step backward. Free cash flow fell to -$US559 million, from -$US287 million a quarter ago. The streaming giant missed estimates on international subscriber growth and revenue, sending shares tumbling by as much as 15%.

The disappointing report has long-standing Netflix bear Michael Pachter of WedBush, who has a $US125 price target, reiterating his bearish outlook. “They’re in a vicious spiral to the bottom in content spend,” Pachter told Business Insider.

And although many analyst have upped their price targets, Pachter warned of the uphill climb Netflix faces in order to turn free-cash-flow positive. He isn’t confident Netflix can produce enough great content to propel it into positive territory, given its liabilities.

“I don’t think the quantity is sufficient to support the service on a stand alone basis,” Pachter said. “Four out of five shows are going to be bad.”

He added, “I think that the company has several long-term commitments, and they have singed a bunch of deals recently like Shonda Rhymes and Ryan Murphy that are not trivial, so they’re signing up a lot of stuff.” Those long-term commitments don’t just include big salaries, but also billions of dollars of debt used to finance the content spend.

With management’s guidance of $US3 billion to $US4 billion of negative free-cash-flow for the fiscal year, Pachter doesn’t see Netflix turning around its cash burn anytime soon. “Without massive price increases, I can’t get to cash-flow positive by 2020,” he said. He thinks the company would have to raise prices to around $US20 a month, a far cry from the current $US10.99.

Netflix is one of the top-performing US stocks this year, up 90%, including Tuesday’s losses.

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