Netflix's continued cash burn could be a concern, analysts say

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Free cash flow for Netflix this quarter came in at -$608 million, up from -$254 million during the year-ago quarter.

Netflix is celebrating strong subscriber growth in the second quarter, but the company’s continued cash burn could become a concern soon.

Free cash flow for Netflix this quarter came in at -$608 million, up from -$254 million during the year-ago quarter. The company expects FCF for the full year to be between -$2 billion and -$2.5 billion.

“With our content strategy paying off in strong member, revenue and profit growth, we think it’s wise to continue to invest. In continued success, we will deploy increased capital in content, particularly in owned originals, and, as we have said before, we expect to be FCF negative for many years,” wrote Netflix in a shareholder letter (PDF).

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Jefferies analyst John Janedis expects FCF will fall directly in the middle of that estimate and that it will total -$2 billion next year. But he’s less sure if it will get worse in the future.

“In our view, it remains unclear if this will be the peak year for cash burn, but we expect the co. will remain cash flow negative through F20,” wrote Janedis in a research note.

RELATED: Netflix’s 5.2M subscriptions more than expected as Q2 revenues rise 32%

MoffettNathanson’s Michael Nathanson said that Netflix’s clear intention to keep burning through cash in order to continue building its subscriber base could be likened to the extended cash burning periods for Amazon and the cable industry before they started generating profits. But he argued that cable companies were building a monopoly they could leverage in those early years and that Amazon was amassing physical scale advantages.

“Here, we just don’t believe that Netflix is building an impenetrable moat that justifies its $80 billion in market cap. Yes, it’s a massively disruptive force, but broadcast, premium and cable networks will continue to pump out their own content … just at lower profits,” Nathanson wrote.

Of course, in addition to adding a record 5.2 million subscribers during the quarter, Netflix also saw its revenues rise 32.3% and its profit rise to $66 million, up from $41 million in the year-ago quarter.

Those figures are leading some analysts like UBS’s Doug Mitchelson to raise expectations for the Netflix. For 2017, Mitchelson raised global net adds by 2.336 million to 21.54 million, revenue by $221 million to $11.516 billion, and EBITDA by $50 million to $900 million.

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