Has Netflix overextended itself?

Netflix has agreed to sell $400 million in stock and convertible bonds Monday in an effort to stockpile some cash. The filings were seen as the latest in a series of bad news for the company by investors, with shares down about five percent. But the raising of short-term funds raises the question of how well Netflix has been managing its cash, particularly as the company has seen customer additions stall at home, while investing heavily to expand internationally.

Netflix has already committed billions of dollars for new streaming deals over the next few years which would be fine if the company had ample cash in the bank, or was still on an outstanding growth trajectory. Netflix finished the third quarter with just $366 million in cash and short-term investments, however, and with $200 million in long-term debt.

The company is hoping to bolster its international business with a planned launch of services in the UK and Ireland in the early part of 2012. So far, its announced Lionsgate, MGM and Miramax are on board for launch in the new market, which follows Netflixs international expansion in Canada and Latin America. Those deals are necessary to keep its international growth going, but they come at a cost: For each new market Netflix has to pay upfront licensing fe! es for t he right to stream titles before it actually launches there.

Meanwhile, its embarked on a series of costly agreements for exclusive content like two seasons of the upcoming David Fincher-Kevin Spacey project House of Cards or the return of Arrested Development, which will appear only on Netflix. Even when its signed up catalog titles from content owners like Disney or CBS, Netflix has been rumored to pay in the range of hundreds of millions of dollars for each of those deals. But few have asked how Netflix would actually fund those additions to its library.

It looks now like Netflix was betting on its future domestic growth domestically to help pay for its streaming library. But growth in its home market has stalled, thanks to a series of missteps that included a price hike and the announcement of a new DVD service called Qwikster, which Netflix later backed away from. Thats an unfortunate turn of events that senior management likely didnt anticipate, and one that might have left Netflix in a bit of a cash crunch.

The problem is exacerbated by the fact that Netflix squandered cash through a series of stock buybacks over the last nine months, when it could have been hoarding cash for the expansion ahead. Instead, Netflix spent nearly $200 million on buybacks, at an average price of $222 a share which is about three times the stocks current share price.

This could be a temporary bump in the road, but Netflix is going to have to show some returned growth and financial stability in the fourth quarter, if its going to get investors back on ! board. I tll also have to show that it can afford to pay all of the license agreements its signed over the past year, as its planned aggressive expansion both in new international markets and in its catalog at home.

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