According to them, the situation should trouble investors because the increase in debt, along with the intention of the online video streaming company to force the conversion of its $200 million outstanding convertible issue, reflects that its free cash flow (FCF) from its business is weak.
The analysts believe Netflix, Inc. (NASDAQ:NFLX) does not have the capability to generate positive FCF this year. They also perceived that the situation is not one-off, instead, they expect the online video streaming company to deliver negative free cash flows going forward due to its increasing streaming commitments.
In a research note, Wedbush Equity Research analysts wrote, “We are dumb founded the Netflix shares continue to rise, indicating that investors do not care about increasing leverage.
“Negative cash flow will likely continue as long as the company pursues its money losing international expansion.”
The analysts also cited that Netflix capital increased in the latter part of 2011 and early 2013 showed that its content costs are increasing more rapidly than its profits. They expect the trend to continue.
The research firm lowered its estimate for the shares of Netflix, Inc. (NASDAQ:NFLX) for FY2013 from $1.00 per share to $0.94 per share because of its higher debt burden. The analysts also maintained their “underperform” rating and 12-month price target of $55 for the stock. According to them, the price target reflects a sum-of-the-parts that value domestic streaming ($28 per share), domestic DVD ($20 per share), and international streaming ($7 per share).
The analysts also identified some risks in attaining their price target for the stock, which include a sudden increase in subscriber growth, declining competition from other movie rental competitors, lower than expected costs for content, technology development and deployment, and improving macroeconomic factors.
Yesterday, we reported that many investors are in “value dilemma” and are questioning if Netlix’s business would be able to justify the high valuation of its equity. The stock price of the company increased significantly over the past two months. Most of its gain was driven by its better-than-expected financial result for the fourth quarter.
Netflix stock is down by more than two percent to around $163 per share during morning trading on Thursday, January 31st.