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After the 4Q15 release and conference call, Netflix ($107.89/share) remains in the Danger Zone, and we are sticking with our Dangerous rating. We consider the focus on international subscriber growth as a purposeful distraction from a failing business and dangerously overvalued stock.

Per our 4Q15 Preview Report, four major challenges to Netflix’s business model remain unanswered.

The trend, since 2010, of content cost growth exceeding revenue growth remains intact. In 2015, streaming content obligations rose 15%, slower than revenues at 23%. However, since 2010, when Netflix began significantly ramping up its content library, obligations have grown by 43% compounded annually while revenues have only grown by 25% compounded annually. Long-term, the amount Netflix owes on its content is outpacing the revenue the company derives from said content.

International contribution margins continue to deteriorate and are not likely to get positive in the near future. The international margin in 2015 was -17.1% compared to -12.2% in 2014. The company’s focus on growth in unprofitable markets is a red flag. Management guided investors to expect profits from the international segment in 2017. Some analysts predict it will take more like five or six years. Either way, it is a long way off, and we are not sure it will ever materialize

Domestic subscriber growth is hitting a wall. Netflix added 1.56 million U.S. subscribers in 4Q15, below expectations of 1.62 million, and well below the 4Q14 additions of 1.9 million. Netflix management stated “Our high penetration in the US seems to be making net additions harder than in the past.”

Netflix continues to burn cash at a high rate and will have to raise capital in 2016 or early 2017. We first highlighted this problem in October 2015, but noted that as long as investment banks can profit from a capital raise, analyst ratings will remain positive on Netflix.