If someone offered you the opportunity to invest your money in a company that has been around for well over a decade, hasn’t had positive cash flow in over 4 years (in fact, actually burned more cash each year), has an idea but can’t really define when they’ll start making positive cash flows…. all for the low, low price of $345 per share, would you take it?

Even though this should sound like a scam, it’s exactly what Netflix and their CEO Reed Hastings ask and get from investors. To be fair, Netflix did have the positive cash flow for many years, and their current spending is their way of expanding their content and their international presence (I also may have added some hyperbole for effect). Nonetheless, investors are giving Netflix a lot of leash, and with share prices at 159x earnings, they’re not discounting much in the way of failure.

However, the focus on the lack of cash currently being generated obfuscates some really important pieces of information that bears may be missing, but bulls see clearly. Netflix may actually be able to flip the switch and generate returns that make the current share price seem like an exceptional bargain. The future of Netflix really becomes a question of execution before the bill collectors come knocking.

Content Is Costly

Although plenty of opinion pieces have noted the cash spend of Netflix, indulge me for a moment. The excel screenshot comes directly from Netflix’s investor presentation. Right now Netflix is running through approximately $1.8B per year. Currently, they make just under $14B in revenue annually, to give you some perspective. But, what really stands out are the investments in content. On a 12-month rolling basis content spend stands at $10.8B. Essentially 80% of all revenues are turned right back around into making content.

Should Netflix Slow Down?

On their face, these numbers may seem completely ludicrous. Netflix made healthy profits by providing customers with a plethora of B rated movies to peruse when there was nothing on television. However, look again at the content spend growth rate for the last 12 months vs. that of the revenue growth rate. You’ll notice that revenues grew 36.2% vs. content spend of 13.1%. Simply put, for every $1 Netflix puts into content spend they turn out $3 in revenue.