The Market Ticker
Commentary on The Capital Markets- Category [Earnings]

One look and my first reaction to the balance sheet was "Holy sheeeit."

Ignore for a minute the fact that it appears the company has something like $9 billion in obligations for streaming content delivery (but not on the balance sheet!) against assets that are less.  People will play that down, after all everyone borrows more than they have and can make, right, and it's perfectly ok to have contingent liabilities for things you are doing that aren't on the sheet, right?

No, no, here's the problem -- 19% domestic paid customer growth against 23% revenue increase.  That's the price increase, but it's also a strong indication that they're pretty-much out of gas here in terms of the exponential growth curve.

International is up a lot more (73%) but the company lost more money, with marketing more than doubling (102%) and cost of revenues (direct costs) up 58%.  In other words net expenses rose 67% -- with revenue rising 75%.

Ok, that's a "positive trend" I suppose, but.... lots of red ink in there internationally.

But the real nasty is in the non-GAAP free cash flow -- it's nearly ten times as negative in 2014 what it was in 2013.

What's even more interesting is that their financing costs went from positive $64 million last quarter of 2013 to negative $51 million this quarter; a swing of more than 110 million the wrong way, and on a 12 month consolidated basis it's over $200 million sucked out of the company, or more than half nominal net income!

Further the firm says it's going to issue more debt.  Sure, why not!  After all, with rates (very near) zero and everyone believing the band will continue to play on, may as well sell some more bonds to more suckers, er, investors.

I wouldn't touch this thing at roughly 90x earnings; as a spec play at 20x sure, but at 90x?

Not a snowball's chance in hell.

PS: IBM's report was terrible -- and arguably more-so -- as well.

Watch out folks -- financial engineering looks great right up until it doesn't, and there's a hell of a lot of it going on here.

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