The biggest story today for video rental/video streaming company Netflix was not its parabolic move higher on earnings that left many scratching their heads, but that the company's exposure of just how vulnerable, and potentially unprepared, to growing pains it is, after its website suffered a multi-hour outage preventing clients (both paying and free) from accessing any streaming movies. And the company, which is betting if not the ranch, the definitely its cash flow on the transition to streaming (in Q3 it spent $115 million on video streaming rights, an 11-fold increase from the same time last year) may very well be unprepared for the priced in exponential growth in new users (even more so since as we pointed out earlier, the bulk of the expansion is to non-paying customers). The reason, as AP pointed out earlier, is that Netflix's streaming service has become so popular that it is now the
largest source of U.S. Internet traffic during peak evening hours. Streaming
by Netflix subscribers accounted for about one-fifth of that peak-time
traffic, more than double the volume flowing from Google Inc.'s YouTube. And this massive infrastructure is supported by... $120 million in PP&E!? Indicatively Google is almost $5 billion. And since the market is expecting continued parabolic growth to its existing customer base of 15.9 million paid users to validate the new business model to which it attributes a lofty 30x+ PE of 2012 Earnings (a deja vu of the dot com days of "story stocks"), the company will soon have no choice but to actually expand its seemingly underfunded infrastructure, which it currently carries at $125 million on its books. Unless, of course, it wants to lose exasperated clients with an ultra short attention span who demand instant gratification and who can easily find substitute streaming providers in these days of Hulu (which itself is about to IPO), and numerous cable channel hosted alternatives. The big problem is that with $8 million of non GAAP free cash flow as disclosed in its Q3 earning release, there is no way this expansion can be funded organically. Furthermore, as the company is currently below its self-disclosed cash floor level, is the only option for Netflix to come out with a follow on offering, and fast? What that would do to a stock that has under $200 million in book equity and almost $9 billion in market cap we leave to our readers' imagination.