Driving: Free Cash Flow and Nflx Free Cash Essay

Submitted By mike12ed
Words: 405
Pages: 2

Netflix (NFLX) must be wondering if there’s any kind of silver lining to that thick grey cloud apparently fixed permanently overhead. The October 23rd earnings report contained little in the way of evidence of any end to the gloom, despite the fact that the company hit its goals of adding new subscribers, signing up 1.2 million in the United States and nearly as many overseas during the just-ended quarter.

Investors reacted to the Netflix earnings announcement by bolting for the exits. In after-hours trading, the company’s stock plunged more than16% to $57 a share. Does this finally make the stock a bargain?

NFLX PE Ratio TTM data by Charts

Not really. True, just looking at the chart above shows that the company’s PE ratio appears to have fallen off a cliff over the last year or so. But its current trailing 12-month P/E is more than double that of the S&P 500 index, and as yesterday’s report showed, it’s having difficulty delivering on the “E” part of the equation.

Part of the problem is that the cost of obtaining all those new customers it is adding – especially overseas – is proving to be a drag on earnings. Netflix announced that its subscription costs soared 28% in the quarter. No wonder its profit margins are under pressure, as seen in the chart below. (Buying content has gotten pricier, too.)

NFLX Profit Margin Quarterly data by YCharts

The company’s free cash flow is at its lowest level since its infancy.

NFLX Free Cash Flow data by…