The Bear Case for Surging Netflix

Shares of Netflix Inc. (NFLX) have risen by about 17% since the media company's stock reached a year-to-date low in September, and many analysts and investors expect the stock to keep climbing. However, analysts like Wells Fargo's Steven Cahall are pushing back, calling for Netflix to decline by as much as 15%, according to a recent report by Barron's. The company could face losses as it boosts spending to keep up with rival streaming services provided by Walt Disney Co. (DIS) and Apple Inc. (AAPL).

Netflix shares fell far more steeply than the market in Monday afternoon on weaker than expected economic data.

Spending Squeeze on Free Cash Flow

With the new Disney+ and Apple TV+ streaming services launched in November by two major rivals, Netflix is up against its toughest streaming competition yet. Netflix CEO Reed Hastings has indicated that content production costs are likely to rise as a result, per Barron's. According to Cahall, the added costs could reverse the company's free cash flow. Consensus expectations currently forecast positive aggregate cash flow of $8.8 billion during the next 5 years. But Cahall estimates Netflix, instead, could post a negative aggregate cash flow of $9.3 billion during the same period. Cahall explains that his team believes the company "can achieve the street's sub growth expectations but those subs will be more expensive than investors realize."

What It Means for Investors

Part of the added production costs for Netflix may come from its shift to movies from television programming. Indeed, Netflix is selling about $2 billion of bonds, increasing its debt in order to finance the additional content production costs. Besides adding to its costs and its debt, Netflix has also faced recent subscriber shortfalls. The company's stock slumped earlier in the year following disappointing subscriber numbers for Q2 2019. In the quarter, the company signed up only 2.8 million international customers, about 2 million shy of expectations. It lost 130,000 domestic customers as well.

What's Next

To be sure, Netflix offers a variety of TV and entertainment content matched by few rivals right now, one reason many investors remain bullish on the stock. But the company's competitive position could worsen as even more competitors enter the streaming race. Telecom and entertainment giant AT&T Inc. (T), for one, plans to launch its HBO Max streaming platform in 2020.