Blain: The Netflix "Ponzi" Math Does Not Make Sense

Blain’s Morning Porridge, Submitted by Bill Blain

“Nobody exists on purpose. Nobody belongs anywhere. We’re all going to die. Come watch TV.”

Joy unconfined. Yesterday, global stock markets went mildly stratospheric on the back of strong US earnings. The US banks are spanking the proverbial ball out the field - hardly surprising as global corporates try and fatten up and over-leverage themselves on cheap rates before the Fed hikes them into debt-driven oblivion. (Oh… harsh, poetic and very fair comment.)

So, this morning, let’s forget about the bad stuff like Junk Bonds, About-to-be-Junk Bonds, Trade, Oil, Saudi, Italy and the rest: party-on, Risk on, and let’s not dig too deep lest we find something worrisome.

Sadly, I suspect y’day will prove to have been out of synch with the deepening decline in overall sentiment. Bloomberg reports that 85% of the fund managers its surveys think the global economy is in “late cycle” - and 38% see recession in the next year. That’s a very strong consensus for recession - much stronger than in late 2007.

If the global Boom is heading for slowdown or bust, then I challenge anyone to justify current stock markets without referencing technical factors such as: “there is nothing else to buy”, “still low interest rates as a result of QE”. Bloomberg references “quantitative tightening” as the big threat as the US Fed hikes rates. I am struggling to find any real fundamental reasons to believe it’s a future of unmitigated happiness and blessed upside for stocks.. But… I’ve been wrong before.

On the basis I am not a stock analyst and understand very little... let me share a few thoughts on Netflix: y’day’s stock-market darling.

Netflix got plaudits when its surprisingly strong rising subscriber numbers triggered 20% price upside. Wowser. Quite a gain - but for how long? Apparently the rising subscriber base justifies its spend on hours and hours and hours of TV Pap. (*Pap - Scottish Bread: very thick, tasteless doughy bread that’s got absolutely nothing healthy in it. Scots love it. Its particularly good deep fried with egg and cheese.. but maybe that’s just me?)

Lets think this thru:

Nexflix’s business success this quarter was to attract 7 million new subscribers by spending $7 billion on new programmes? Go figure. Are these subscribers paying $1000 per quarter? I don’t think so. Is that a model? What’s the game? Spend billions to get millions from subscribers. Not sure how that works, but hey the stock market loves it. The stock price goes up and everyone is massively happy.

I suppose it works if Netflix can continue to spend more and more enticing new subscribers into the service while the existing subscribers pay for it. At some point I suppose they break even? But that would mean investors would need to stay about 8 years before they paid their “in” cost.. and doesn’t it sound and feel just a tiny bit… well Ponzi??

Am I missing something?

I love Netflix... at least I would if there was actually anything I could be bothered to watch on it. Sure, I was delighted at first. I was a little boy let loose in a veritable toyshop of apparently binge-worthy TV. I binged. Yes I did. But now… I only turn over if there’s absolutely nothing on terrestrial TV and I’ve already watched the new season of Vikings on Prime. The only reason we’ve not cancelled Netflix is because we lack the willpower or energy to do so. I wonder how many subscribers sign up… watch a couple of programmes, and then don’t bother.. and then unsubscribe? If I were a stock analyst I’d be asking these questions. But I’m not..

About the only reason I’ve kept Netflix is waiting for the next season of Rick & Morty - but what I pay for my Netflix subscription it prob makes sense to buy it on Prime. Ach, the convoluted economics of watching TV.