Here’s Why the Next Qwikster-Style Blunder Won’t Kill Netflix

Source: Netflix.

Could Qwikster have killed Netflix?

Netflix stumbled badly with the ill-fated Qwikster launch. The stock chart won’t let investors forget it.

But… Was the company ever in real danger?

Source: Netflix.

The market pain sure was real!

Qwikster And the Plunging Netflix Stock (2011)

Sorry! • Netflix CEO Reed Hastings

apologized and killed Qwikster in the cradle.

• Subscriber growth took a hit, and Netflix still walks on eggshells.

• The real business damage? Let’s have a look…

Source: Netflix.

Sales never slowed down

Meanwhile, revenue soared…

Earnings? Mostly okay

… and earnings fell in 2012 but hardly to disastrous levels

Netflix can control its costs

• Netflix could always control earnings by adjusting budgets.

• Marketing and content costs spring to mind.

Didn’t Netflix run out of cash, though?

Can you find the Qwikster episode on this chart of Netflix cash and debt balances?

(hint!)

More cash, more debt. What’s the point?

Why raise debt, only to boost cash balances?

• With no debt and minimal cash on hand, the next misstep could actually kill the company.

• This is the safety net under Netflix’s high-wire international growth act.

• And interest rates are at historically low levels. Why not take advantage while rates are affordable?

Netflix debt vs. interest rates

Strike while the iron is hot

What is Netflix spending all that cash on?

Great content doesn’t come cheap It’s all about high-quality content. • If Netflix wants to win customers over from TV networks and other online video

services, top-notch content is the way to do it.

• The company’s original titles have won Emmys, Golden Globes, and even an Oscar – although buying the Oscar winner isn’t quite the same as producing a hit from scratch.

• An exclusive license from Dreamworks Animation (NYSE: DWA) joins up with another exclusive contract with Walt Disney (NYSE: DIS) in 2016.

• Quality content wins, both in domestic and overseas markets.

• You have to spend money now to make money later. Netflix knows this, and acts accordingly.

How borrowed money is helping Netflix today

Taking on debt gave Netflix some extra breathing room – and flexibility to try new strategies. • Today, the company spends nearly 10% of its content budget on original shows, like

Orange Is the New Black and House of Cards.

• Domestic growth is back on track: U.S. subscriber counts increased by 35% over the last 4 quarters.

• International subscribers nearly doubled year-over-year, growing by 85%.

• This week, Netflix announced another 6 European markets, including Germany and France.

• Without debt-boosted cash reserves, investors would worry about running out of cash if something goes wrong.

• As is, the company can afford to make a few mistakes along the way.

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