Netflix: Burn Concern?

While marginally profitable under accounting standards, Netflix burns through piles of cash. Time to be concerned?

We used Word2Vec to process 1259 articles that appeared on Dow Jones/Factiva between Netflix's two most reporting periods -- January 17, 2019 and April 16, 2019. Each article selected mentioned Netflix at least five times and was classified by Factiva as a "Corporate/Industrial News" piece. (Factiva is a global news resource with over 32,000 premium publications.)

We were interested in the extent to which these articles reflected concern about Netflix cash burn as its builds out its massive content offering. After all, Netflix reported a negative $2.7B cash flow from operations in the year ending 2018, even larger than the burn of -$1.8B from the previous year. And the company is in no hurry to start generating positive cash flow.

While some worry about this cash hole digging a grave, others assert such spending was building a competitive moat. The latter argue that only an investor rookie worries about free cash flow at this stage of the game. Netflix's burn, the argument goes, is strategically sound as it garners and cements market share -- just like Amazon did.

So how how much "burn concern" was reflected in the 1259 Factiva articles appearing during the quarter leading up to its most recent results?

Here are the top ten words closest to the "Netflix" and "cash" couple according to our Word2Vec results. (Recall that Word2Vec processes raw text and positions words in a high dimensional vector space where semantically similar words are placed at nearby points.)

('spending', 0.777),

('increasing', 0.742),

('worth', 0.713),

('investing', 0.691),

('beat', 0.670),

('double', 0.667),

('add', 0.666),

('grow', 0.654),

('boost', 0.653),

('billion', 0.648)

Some observations:

• Contrary to our initial expectations, words such as "burn", "negative", or "trouble" are not at all prominent. Instead neutral words such as "spending" or even more positive words such as "investing", "grow", and "boost" occupy the space closest to Netflix and cash.
• For now, business publications appear to have largely bought into the Netflix strategy of spending/investing to build brand and attain global market share.
• Not surprisingly, Netflix's stock price has held its lofty valuation during this three month period of time, despite galloping hoofs of competition approaching from multiple directions.

When we repeat a similar Word2Vec analysis for the current quarter, should we expect to find a different set of words/phrases that reflect concerns such as:

• Will loss of pricing power (given aggressive pricing of competitive services) place a damper on Netflix's reach for positive free cash flow?
• Can Netflix continue to offer sweet deals to top talent, given the stress this puts on cash outflows?
• Given its huge customer base, will Netflix begin to explore a new business model to generate high margin revenue? In other words, can Netflix find what Amazon achieved with AWS or Disney discovered with merchandise licensing?

Or maybe Netflix will continue to operate for another quarter as is, burning cash yet still being protected under the sunscreen of first-mover disruption?