Netflix Inc. shares set a fresh record in early trade Tuesday after stronger-than-expected third-quarter revenue growth, but one investor is not impressed.
Hedge-fund manager Doug Kass said he continues to feel “air sick on the valuation,” which he estimates is 100 times 12-month trailing EBITD, or earnings before interest, taxes, and depreciation. He reiterated his stance that investors should sell Netflix NFLX, -1.07% and stay away altogether, and not even short the stock.
“There is no free cash flow,” he wrote in his latest bear rant on the company. “Cash is burning and the “great” content is aging and must be added at the rate of at least $ 1 billion a year starting at a base of $ 5 billion.”
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While headline numbers looked good—revenue grew more than 30%–but conversion of incremental revenue to EBITD, a factor Kass likes to monitor, was close to 15%, “an improvement over past results but not great,” he wrote.
Net debt has grown to $ 3 billion, small relative to equity value of $ 93 billion, but large relative to the training 12-month EBITD of $ 850 million.
“NFLX would be well-advised to sell equity at this valuation and cash burn,” said Kass. “The multiple is a scary 112 times.”
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Netflix is not fully immune to competition, which is growing as more players enter the streaming field. Already, Walt Disney Co. DIS, -0.20% has said it will put its content, and Hulu, a joint venture between Disney, Comcast Corp. CMCSA, -0.18% 21st Century Fox Inc. FOXA, -0.11% and Time Warner Inc. TWX, +0.04% is performing strongly, if invisibly to investors. Then there’s the juggernaut that is Amazon.com Inc. AMZN, +0.38% which is expanding its offer and using it as a loss leader to grow its Prime Member base.
Apple Inc. AAPL, +0.01% is also getting on the action, signing a deal with director Steven Spielberg’s Amblin Television and Comcast Corp.’s NBCUniversal television production unit to make new episodes of “Amazing Stories,” a science fiction and horror anthology series that ran on NBC in the 1980s, as The Wall Street Journal reported.
“At some point, these competitive factors will take their toll, but that certainly will not happen in the next quarter, which will benefit from a price increase and strong sub gains,” he wrote.
Kass urged investors to avoid Netflix back in July, in a note explaining that shorting the stock is a risky move. Short interest at the time was 28 million shares, compared with a float of 425 million shares and average daily trading volume of 7 million shares.
That’s too much, “precluding me from shorting the shares for fear of a continued short squeeze,” he said.
Short interest currently stands at about 27 million shares, according to FactSet data.
Netflix shares have gained 62% in 2017, while the S&P 500 SPX, -0.07% has gained 14% and the Dow Jones Industrial Average DJIA, +0.11% has gained 16%.
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