I've been bored this afternoon, so I spent a little time digging through Netflix's annual reports to see if I can find an explanation for why a drop in subscribership cratered their stock.

Wanna see what I found? Too bad, you're gonna. (thread 🧵)

Let's start with a basic overview of their business. Netflix streams video content to paying subscribers over the Internet. In 2021, they brought in $29.7 billion in revenue. Streaming revenue accounted for 99.4% of that (the other .6% was DVD rental - yes, they still do that).

That sounds like a lot, right? But a comparison of their gross revenue (money that comes in) to their net income (money that's left after expenses) reveals that most of it goes right back out the door. Out of that $29.7B of revenue, they only held on to around $5.1 billion.

So where does all that money go? The vast majority goes to "cost of revenues," which is accounting-speak for money you had to spend to make money. For Netflix, that means licensing content and operating the infrastructure to stream it. They spent $17.3 billion on that in 2021.

Next question: how does a company that only nets $5B a year spend $17B a year on content licensing?

The answer is: they borrowed it. Netflix has spent the last decade borrowing like crazy. At the peak, in 2020, they held more than $16 billion in long-term debt.

And of course, when you borrow money, eventually you have to pay it back. Most of Netflix's debts won't come due until 2028, but starting then, they have some big checks they're going to have to write over the next few years.

You may have noticed that their debt obligations in 2028 & 2029 are in the $4-5B per year range.

In other words, they are going to have to make debt payments close to or equal the ENTIRE ANNUAL NET INCOME they make today.

And there is the thorn in the rose. For Netflix to comfortably be able to pay those debts back, it would ideally have significantly more net income than it does today. They could MAYBE make those payments with the income level they have today.

But if income goes DOWN? Gulp.

To increase income, Netflix has to increase revenue. And in their current model, the only way to increase revenue is to get more subscribers. They HAVE TO GET MORE SUBSCRIBERS to make their nut.

Which is why traders flipped out when they LOST 200,000. abcnews.go.com/Business/wireSt

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@jalefkowit Could they raise the funds some other way, e.g. if they're publicly traded, issue more stock?

@Ertain They can always issue more stock! But that dilutes the value of existing stock, which existing shareholders don't like. And potential new shareholders may be wary to buy in if the pitch is "please help us avoid this gigantic iceberg we've spent the last decade steering towards." They may want to see new management before they'd be willing to buy in.

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