Netflix Inc. closed with a 20 percent gain on Tuesday trade following the company’s shooting revenues in its most recent fiscal quarter earnings report that was significantly higher than previous quarterly prospects which led to several analysts increasing their estimates of the stock’s price targets. The surge was followed by another uptick on early Wednesday trade.
Despite evident gains, the online entertainment pioneer faces a swelling debt and dwindling cash flow thus propagating concerns to some analysts.
Netflix announced its plans to expand further by issuing additional debt. The scope of the planned expansion includes localizing large international markets’ service and producing their own content.
Michael Pachter, a Wedbush Securities analyst, said in a statement to clients on Tuesday that his worries go over the investors becoming oblivious to the company’s cash burn as its subscriber growth becomes overwhelming.
The analyst also repeated to give the stock an underperform rating but increased share target to $60 from $10, mirroring post-fiscal quarter report buying hysteria. He still believes that Netflix is being overvalued.
“Netflix continues to spend exorbitantly for original and exclusive content, while international profitability remains elusive and competition for both content and subscribers is becoming more fierce,” he said. “Cash burn is unacceptably high, and we are skeptical that the company can successfully build a content library that will justify its high level of spending.”
Netflix also remarked on the growing competition despite having the lion’s share of the market, with Amazon.com Inc.’s Prime Video service on the rise as well as Alphabet Inc.’s YouTube.
The company’s quarterly profit was much better than the previous quarters and even went beyond Wall Street’s expectations. But its burn rate is fast picking up as it shells out up-front expenditures to produce its own content.
Cash equivalents toppled 40 percent from $2.3 billion to $1.3 billion during the year-earlier period with the streaming giant’s operational expenses doubling to $462 million from $196 million. A downward trend on cash and equivalents has been evident for the past year with $969 million as of September 30, 2016 as opposed to the $2.1 billion worth of cash equivalents reported in the same time last year.
On the flipside, Netflix recognized that its attempt to penetrate China as part of its expansion plans still has a good long way to go. China, with a broad market potential of 1.4 billion customers, observes strict rules when it comes to the import and screening of foreign content making it hard to operate their own service in the country. However, as a contingency plan, Netflix will more likely opt for licensing their content to existing online service providers in China although this move will only earn them modest gains.
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