Netflix, Inc. (NFLX) Bulls: Cash or Plastic?

That would have reduced Netflix, Inc. (NASDAQ:NFLX)’s Q1 operating income from $32 million to $19 million. There would have been a similar effect in Q2, when Netflix launched two new Originals: Hemlock Grove and Season 4 of Arrested Development.

According to Netflix, Inc. (NASDAQ:NFLX) executives and bulls, Netflix Originals have played a big role in the company’s strong subscriber growth. Yet the heavy costs of securing this content have been pushed out to 2014-2016 for accounting purposes. Cash doesn’t lie, though. Heavy spending on originals (which are actually front-loaded from a cash cost perspective) has caused Netflix to rack up $100 million of negative free cash flow in the last four quarters. That said, Netflix did manage to produce positive free cash flow last quarter.

Foolish bottom line
Maintaining and improving the quality and quantity of its content is clearly necessary to drive subscriber growth at Netflix, Inc. (NASDAQ:NFLX). However, high-quality content is expensive, and high-profile original series are even pricier.

This year, Netflix, Inc. (NASDAQ:NFLX) bulls have had it both ways. Netflix has signed several high-profile content deals — none of which has gone into effect yet. Meanwhile, it has added several highly anticipated original series, for which the vast majority of the costs will be recognized in later years.

As a result, Netflix, Inc. (NASDAQ:NFLX) investors haven’t had to come to grips with the expense of all this new content. But as content expense starts to pile up over the coming years, Netflix investors are likely to discover that the highly competitive Internet TV business is not nearly as profitable as the company’s more than $18 billion market cap implies.

The article Netflix Bulls Want to Have It Both Ways originally appeared on Fool.com.

Adam Levine-Weinberg is short shares of Netflix and Amazon.com and has the following options: long December 2013 $275 puts on Netflix. The Motley Fool recommends DreamWorks Animation. It recommends and owns shares of Amazon.com, Netflix, and Walt Disney (NYSE:DIS). 

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