The Netflix Inc. app is demonstrated for a photograph. (Photographer: Daniel Acker/Bloomberg)

Netflix Will Go Bust If It Can’t Curb Cash Burn, Says Aswath Damodaran

There is no doubt that Netflix has changed the way television is consumed. It has managed to play the consumer expectation game the way it wants, spending billions on content that it delivers to its users. That’s also what’s “troubling” about the Netflix story, according to Aswath Damodaran, professor of finance at NYU Stern School of Business.

“This is a company which spends $9 billion in content; and if they keep doing it, they will go bankrupt,” he told BloombergQuint in an interview. Damodaran, who has studied Netflix valuation, said he didn’t know what binge watching TV was, until he learnt it from Netflix.

By changing the way the game is played, Netflix has made it look like it can win, he said. “The danger though is, in the process of winning the market, it might actually destroy itself as a business.”

As the smallest of FANG—Facebook, Amazon, Netflix and Google—stocks, Netflix’s market capitalisation climbed to $139 billion in March 2018. Subscriber base becomes the company’s dominant number, and that has allowed it to increase revenues over time, Damodaran wrote in his blog titled “Netflix: The Future of Entertainment or House of Cards?”

The California-based entertainment company’s content cost, therefore, becomes the most crucial number, he said.

How well they can control the content cost will determine for me whether Netflix is worth $250 per share or nothing per share; because if they don’t keep content cost under control, then they are worth nothing.
Aswath Damodaran, Professor, NYU Stern School of Business

Netflix signed up 26 million net new subscribers for its streaming video service in the past year, Bloomberg reported. The company also posted its strongest first quarter since going public 16 years ago.

One feature that all FANG stocks share is, rather than let market analysts set their game and measure their success, they have managed to frame their own stories, Damodaran said, adding that Netflix has conditioned the market to treat it as a win.

The Netflix management, he said, should recognise how important it is to bring content cost under control as that’s a value driver.