The subscription economy and ‘zombie’ companies
If, like the Lens, you are giving more of your viewing time to Netflix, it must cross your mind what a great investment it ought to be. After all, you use it all the time and so does everyone you know.
In fact, never have crime thrillers and zombie fests been so potentially rewarding.
But they are also expensive for Netflix to make and the Lens was reminded this week that not all pension schemes necessarily view companies whose goods are used daily by ourselves and our friends are, by extension, also viewed as good for investment portfolios.
A scheme we met with was concerned about ‘negative cash flow investing’, which the Lens suspects could form a greater part of the conversations fund managers have with clients when it comes to investing in subscription-based services that are all the rage.
What is negative free cash flow? Whereas ‘free cash flow’ (or positive free cash flow) represents the cash a company has left over after meeting its operating expenses, a company with negative free cash flow would raise questions about the company’s ability to generate enough cash to support itself.
For the scheme manager spoken to, the prospect of negative free cash flow hovers around some of the most attractive tech firms that operate subscription models. This is because of the risk these firms have of paying more for their content than they are receiving from subscribers.
Netflix is a case in point, when last year it was reported the firm was expecting its operations and investments to consume $2.5 billion in cash during 2017 and that analysts were concerned about its resulting negative free cash flow continuing for more years to come. The fear is, the Lens supposes, that it could give another meaning to the term ‘zombie company’.
Netflix added millions more subscribers last year, and its share price reflected this success. The more subscribers Netflix gains, the more the issue of negative free cash would fade away. And from Netflix’s point of view, the upfront costs of producing content now, will produce dividends in the years to come. However, the scheme manager – who remembers the dotcom bubble and the trouble this led pension funds into – is concerned whether competition in the subscription sector would make this possible and whether schemes are best staying out of negative cash-flow companies.
The Lens is happy to leave the question of negative free cash flow investing to schemes and their managers, but the subject does make us question the theory that the best investments are in the companies from which we buy from ourselves.