"Wedbush Securities analyst Michael Pachter -- a noted Netflix bear -- warned his customers that the cash grab looks desperate... "Negative cash flow will likely continue as long as the company pursues its money-losing international expansion," Pachter wrote, as if twisting his knife in an already expired corpse.
Okay, Netflix has indeed been spending money quite freely. Then again, it took on that first haul of loans just as the service launched across Latin America and the Caribbean. The British Isles and Scandinavia soon followed suit.
These international expansion moves don't come for free, you know. It's not so much about operating costs, since bandwidth is nearly free these days and Netflix runs a lean back-end service on cloud servers rather than building data centers. But every new market requires a fresh batch of license agreements with local and global content providers. And then there's the marketing bill. You can't just build the service and hope that customers will find it on their own -- bootstrapping a brand-new geographic market can be expensive....
The Canadian market turned profitable in less than two years. Latin America and the European outposts should do likewise -- perhaps a bit slower or a little faster, but in the same ballpark. The costs may look high now, but will vanish in a sea of serious cash flows over the next couple of years. That will not only show investors what this long-term plan really is worth, but should also let Netflix expand even faster across the globe.
You ain't seen nothing yet.
So yeah, Netflix is investing in future growth right now. Michael Pachter calls it a cash crunch, but I call it building the future. May I remind you that even Apple (NASDAQ: AAPL ) reported negative cash flows as it moved out of the iPod era, into the fantastically profitable iPhone epoch? Those temporary dips into cash reserves set the stage for fantastic sales growth -- and the rest is history"
If the international growth slows after 9 months and it takes 2 years to be profitable, how will they ever make a decent returm? They won't and by the time the churn kills them, they'll be writing off all that investment