Netflix stock price is its own “house of cards” waiting to fall

Trading at nearly 300 times earnings, the debt-fueled stock market has placed a considerably high valuation on Netflix.

Netflix is a microcosm of the world. Just as most consumers and nations are debt ridden, overly speculative, and at the peak of irrational exuberance, so is Netflix.

A recent article “Netflix sinking deeper into debt to fuel subscriber growth” provides some interesting insight into this overvalued company:

Netflix is sinking deeper into debt in its relentless pursuit of more viewers, leaving the company little margin for error as it tries to build the world’s biggest video subscription service.

The Los Gatos, California, company has to borrow to pay for most of its programming expenses because it doesn’t generate enough cash on its own. Netflix burned through another $465 million in the most recent quarter, which is known as “negative cash flow” in accounting parlance.

With such a valuable stock, Netflix theoretically could sell more shares to raise money — similar to how homeowners sometimes use the equity accrued in their houses to pay big bills.

But that would be more difficult to do if Netflix’s stock price plummets amid concerns about its debt.

“What is something like Season One of ‘House of Cards’ worth to you if you already have watched it? It’s probably only worth something to someone who hasn’t been subscribing to Netflix for the past five years,” Pachter says. “So that means Netflix has to keep reinventing itself virtually every year, and that costs money.”

Just like how in 2008 the rise of home equity loans in the U.S. signaled financial distress, particularly showing how many homeowners couldn’t actually afford their mortgages, it didn’t matter how high the housing prices went if the underlying debt problem lingered.

Netflix has a legitimate product, so while it may not go to zero when the inevitable unraveling of debt occurs in all financial markets, it sure has a long way to fall. If it does the equivalent of a HELOC by selling its shares to raise money, it is merely drawing from another source of debt — the leverage used by market speculators.

It should be obvious how fragile this stock is. It’s a “house of cards” waiting to crash.

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