How to Flush $5,000,000,000 Down the Drain - A Netflix Original Documentary

[Music] So Netflix reported their Q1 2021 earnings on Tuesday, Tuesday, April 20th. Overall, their results weren't too bad. Of course, we know Netflix makes money through selling subscriptions to their streaming service. Overall, their revenue was up, grew 24 percent year over year to $7.2 billion, and they were able to increase the average revenue per membership by six percent.

But they were also able to keep their expenses under control, with their operating expenses only rising about 10 percent year over year. So they made a lot more but spent only a little bit more. Thus, their margins increased, and their margins grew up to 27%. Their operating margin grew up to 27% this quarter, which is a big shift from the 16% that it was at just 12 months ago.

All this leads to Netflix posting record net income for the quarter of $1.7 billion, which is up a huge 140 percent year-over-year. So looking at these financial results from Netflix, they were actually pretty good for the quarter. Despite what many investors were a bit annoyed about is that they missed their guidance for some new subscriber additions. They were anticipating to add six million subscribers for the quarter, but they only managed to add four million.

However, to be fair to the management team, they've been saying that there is a slowdown ahead because of what happened during the lockdown. Their massive, massive subscriber additions that they were seeing throughout 2020 were mainly just pull-forwards from people that would have signed up to Netflix in future quarters. By the way, all the charts that I've used so far in the video are straight from Hyperchart, so you might have seen Hyperchart sponsoring some of the content on the channel recently. But that's actually what Hypercharts looks like, and I hope that demonstrates just how helpful a site like Hypercharts can be.

So maybe you don't follow Netflix, but there's a company you might want to check out on Hyperchart. So links are down in the description if you want to check that out. But overall, so a decent quarter from Netflix. However, there is one thing that they stuck in their quarterly update to their shareholders that really, really ticked me off.

If you've been following my content for any kind of length of time, you probably already know the gripe that I have with Netflix's business model. If we rewind the clock five years ago, that was simply just licensing everybody else's content and sticking it on their streaming service. For example, they would license the Star Wars content from Disney to stick it on Netflix.

Now, the problem here is that because they were so successful in the streaming service space, all of the big content creators are making their own streaming services. For example, Disney Plus. So all of that licensed content is now no longer available to Netflix, and it goes back to the original content owners for their own certain streaming service.

Now, what that's led Netflix to have to do over the past five years is invest heavily in their own production, right? They need to create their own high-quality original content that will rival the content that's on other streaming services. This means building production studios, hiring directors, actors, editing, the whole thing, right? The whole thing.

To be able to do this, Netflix has been under some pretty tight financial pressure in order to get it done. In fact, they've actually taken on a whole lot of debt to be able to make this happen. If we look back 10 years ago in 2010, 11 years ago in 2010, they had just $200 million in debt. That grew to $900 million by 2014, but still didn't really look like anything. But now, have a look at what's happened since then: $2.371 billion in debt, $3.364 billion in debt, you know, $6.5 billion, $10 billion, $14 billion, $16 billion.

In six years, they've taken on $14.9 billion of debt. Now, if you're a long-term Netflix shareholder, what are you thinking? You're thinking, "Okay, they've taken on all this debt. I really hope that that has led them to be able to make, to generate some really juicy cash flows that more than cover the debt that they've taken on."

If we look at Netflix's cash flows, it's really not that fantastic until we hit Q1 of last year because, of course, that's when the lockdown happened. That's when a lot of people decided to sign up to Netflix, which actually helped them get their cash flow positive for multiple quarters during 2020.

But here's the thing: now that the pull forward is over for Netflix, management have gone back and said, "Look, we actually just think we're going to be about cash flow break-even." So ultimately, we have Netflix as this company that really isn't making much money at all. They're also sunk in about $15-16 billion of debt.

On top of that, the stock is currently really expensive. It currently sits at a P/E ratio of 61.5. So it's a stock where investors are expecting a lot; they don't really make all that much money, and they're also pinned down by a big debt load. With those three things in mind, then in the Q1 2021 update, the management team comes out and says this to investors:

"During the quarter, we repaid our 5.375 February 1st, 2021 bond out of balance sheet cash, reducing our total gross debt balance to $15.7 billion as of March 31, 2021. We intend to maintain $10 to $15 billion of gross debt."

And get this, this is the crazy bit, this is the silly bit: "Our board has approved a program to repurchase up to $5 billion of our common stock beginning in 2021 with no fixed expiration date."

Wow, wow, wow, Netflix! What are you doing? You want to do a $5 billion share buyback program? So what this means is they want to spend $5 billion of their own money, which in all honesty probably a lot of that money was raised by taking on debt at some stage in the past. They want to spend $5 billion on buying back their own shares, clearing their own company shares off the table.

But they want to do this at a time where the stock currently sits at a P/E ratio of 60. To me, that sounds like a tremendous waste of money. You might ask why. Well, first of all, they're doing it at a time, as I just said, where the P/E ratio is at 60. So for the $5 billion spent in buying back their own stock, they're not even clearing that many shares off the table.

So the benefit to their pre-existing shareholders isn't even that great because they're overpaying for their own stock. So that's the first bit. It's expensive; it's silly to do a buyback. As Warren Buffett says, if you're doing a buyback, make sure your stock is undervalued, okay? Get the maximum bang for your buck for your long-term shareholders; don't waste your money.

But then secondly, in terms of the long-term prosperity of the business, wouldn't you want the $5 billion to be put towards something like content creation? Wouldn't you want the $5 billion to be sunk into Netflix creating more high-quality original content to rival Amazon with their streaming service or Disney with Disney Plus?

If I was a shareholder, that is exactly where I'd want the money to be spent because think about it like this: okay, The Mandalorian, a wildly successful Star Wars TV series over on Disney Plus, costs about $15 million per episode. It's a lot of money for about what, 40 minutes of content? And there are overall eight episodes in a season. So overall, one season of The Mandalorian costs $120 million. With $5 billion, you could make 41 seasons of The Mandalorian!

How crazy is that? Or consider The Wolf of Wall Street. The Wolf of Wall Street, obviously a successful stock market movie, cost $100 million to make. With $5 billion, you could make 50 Wolf of Wall Streets!

So, if you're Netflix, and your primary problem with your business right now is that you need to make more original content to keep your competitive position in the space as Amazon, Disney, and other brands come to market with their own streaming service products, doesn't it make sense that you want to spend every single cent you've got into making more high-quality original content?

Or if you really want to do your investors a solid, why don't you just use that $5 billion and reduce your long-term debt load? Do your long-term investors a favor while they're stressing out because you're not reliably producing cash flow and you're adding massive chunks of debt every quarter.

Why don't you do them a favor and say, "You know what? Instead of burning money on a stock buyback when our stock is sky high, why don't we just ensure lower the risk of bankruptcy of our business in the future and reduce our long-term debt load? Why don't we run with $10 billion of long-term debt instead of $15 billion of long-term debt?"

I mean, this really annoys me. Yes, you're doing your short-term minded investors a favor; you're helping them increase their percentage ownership in the business. But, I mean, that money just to me would just be so much better used at making more content, making your business better, and furthering your competitive advantage. Do that or reduce your debt load. I mean, do either of those things. But burning $5 billion on just buying back your own stock... Oh, I mean, am I crazy? Am I missing something?

Maybe I'm missing something here because this just seems ridiculous to me. A share buyback just seems like the last thing that a long-term Netflix investor would want. That's what I try and do; I try and kind of put myself in the shoes of, say, a long-term Netflix shareholder. I think if I was in their shoes, I see big companies like Amazon and Disney that have diversified business operations. They make money in heaps of different diversified ways, and then they take that money and they pump it into making their streaming services and their content bigger and better.

And man, I'm stressed. I'm thinking, "You know, Netflix, we really need to put all of the money we've got into content creation because these other companies, they run their streaming services at a loss in order to undercut Netflix and grab market share. And they can do that because they've got like five different parts of their business each."

Okay, Netflix can't do that. They've got one part of their business: their streaming service. They make money in one way, so they don't have that luxury, so they better make every financial decision they make—better be absolutely bang on if they're to maintain their long-term competitive position.

Ultimately, Netflix needs to continue to come out with original content that draws people in, that attracts the attention of people away from, you know, I think about Disney, what they're coming out with at the moment, the new Marvel shows that have come out that are capturing everyone's attention, like Falcon and The Winter Soldier and WandaVision. I'm thinking, like, remember when Amazon signed up the old Top Gear guys and they made The Grand Tour? How much attention got drawn over to Amazon's streaming service because that show, The Grand Tour, was exclusively on Amazon?

Netflix needs to put every spare cent they've got into creating that original content that is going to suck people into continuing to pay month after month for Netflix. But anyway, am I crazy? To me, this buyback just seems bonkers. I just don't understand why they would want to do it, but you know, maybe I am missing something.

Let me know what your thoughts are down in the comments section below. Leave a like on the video if you did enjoy it; I hope you did enjoy it. A bit of a rant really, but yeah, leave a like and subscribe to the channel if you have not done so already. Check out Profitful if you're interested—links are down in the description below. If you'd like to learn how I go about my investing, both my active investing and my passive investing courses are linked in the description if you are interested.

But that'll do me for today, guys. Thanks for watching, and I'll see you guys in the next video. Um [Music] so you.