Netflix And Amazon: Case Studies In Accounting Games

Over the time since I started the Short Seller’s Journal, several subscribers have asked about Netflix (NFLX). For some reason I have refrained from presenting it as a short idea, instead choosing AMZN and TSLA as my insanely overvalued “tech poison” short-sell ideas. However, knowing that NFLX was reporting this week, I decided what if – and really more like when – it spiked up on a headline “beat,” I would take a close look at the numbers to see what’s going on with NFLX accounting. Just as you would look through different options for your own accounts, perhaps making a quickbooks freshbooks comparison, so too should you look through the numbers when it comes to investing. Sifting through NFLX’s web of accounting chicanery took a lot longer than I anticipated…

As I expected, I found a company that pushes the envelope in an area of GAAP accounting in which there is a substantial “grey” area that enables companies like NFLX to manufacture and manage reported GAAP net income. But NFLX bleeds cash, as I’ll show. The quote at the top summarizes the NFLX business model: it will burn cash “for many years.”

In a sense, NFLX is similar to a Ponzi scheme. As long as cash received in the form of revenues and stock or bond financing exceeds cash expense outflows each year, it can continue operating. But as soon as revenues decline or the capital markets refuse to give NFLX money, it will collapse. As you will see below, while NFLX is generating growth in its net income, the amount of cash burned by its operations has been increasing dramatically. And it has been financing this cash flow deficit with debt.

The above narrative is from last week’s Short Seller’s Journal. I walked through the areas in which NFLX exploits grey areas in GAAP accounting rules to manipulate the cash flows from its business model (cash revenues minus actual cash expenses) in order present GAAP net income. The primary lever it uses is the guidelines (note: “guidelines” – not “rules”) for depreciating media capex. I show step-by-step how NFLX exploited the grey areas in GAAP to manufacture the $0.15 earnings per share it reported.

I also discussed strategies for shorting NFLX, which included shorting the stock outright and using puts. Subscribers who shorted NFLX on Monday morning this past week are green on their short positions. I also suggested capital management strategies.

This week I will be showing how to dissect the numbers AMZN must disclose in the footnotes to its 10-Q filing to see what’s really going on beneath the Jeff Bezos show. For instance Bezos opens his earnings presentation every quarter with a slide and a discussion of the “Free Cash Flow” produced my AMZN on an LTM basis. It’s the very first slide in the earnings call slide show. He’s now claiming LTM FCF of $9.7 billion.

BUT in the footnotes to the 10-Q – a place where no Wall Street analyst ever dares to venture, assuming they even know the footnotes exist – there’s a disclosure that explains that Jeff Bezos FCF is not GAAP FCF. Using GAAP, the Bezos FCF is reduced to $4.1 billion. I’m using ETIDA minus Capex minus Capital Lease Amortization payments. I even give him the benefit of adding back the non-cash share compensation portion of salary, which technically is not allowed in GAAP because share dilution is a form of cash use ultimately from the shareholders perspective. The $4.1 billion is GAAP free cash flow, not the Bezos bullshit FCF.

And not only that, but the AMZN core business model is starting to break down. But that analysis will be saved for this week’s Short Seller’s Journal. Subscribers to the SSJ also get 50% off a subscription to the Mining Stock Journal. Click here to learn more about the SSJ: Short Seller’s Journal info.

Dave, just a moment for some feed back. I just placed and order for 1 oz gold eagles thanks to my profits off Tesla and BBBY. Thanks, as always. – Subscriber email received in early July

9 thoughts on “Netflix And Amazon: Case Studies In Accounting Games

  1. Dave you are doing yourself no favors by engaging in forensic
    accounting. When I wrap up the market on a daily basis and
    particularly on a Friday I need our viewers to be as docile as
    possible over the weekend. I would encourage you to abandon
    this platform of insight and information. We can never even
    consider having you on as a guest if you continue this type of
    Regards, Bob Pisani CNBC

    1. Is he still around? I thought he was laughed off the air when he went into the GLD section of HSBC’s vault
      and picked up a bar of gold and, based on the serial #, was not a GLD bar but it was on the GLD pallet. LOL

      I remember in like 2003 he called gold the “terrorists’ metal”

      1. He;s the biggest cheerleader on CNBS. In fact the
        other day he was doing a market wrap up while
        I was waiting for my flight. He was donning a skirt.

  2. These mega-capitalization stocks with insane P/E values could be fronts for certain projects with unlimited money-printing resources to bolster the price. Short sellers beware.

    1. You are right. No matter how crappy these companies’ fundamentals are, their stock prices keep moving up and up. In today’s stock market you need to “read the tape” to see what is happening. I myself have been an Amazon skeptic since it was $500 change but based on my reading of the tape, I felt it would run up to 700 or even 800. It has exceeded those expectations. This non stop upward movement has created a very dangerous situation where real investors cannot invest in a bloated stock nor can they short it. You cannot just throw out fundamentals and buy a stock just because it keeps going up non stop while weak on fundamentals.

      1. Check out Miles Williams Mathis’s excellent essay 3/10/17 entitled
        –“Jeff Bezos looks like another CIA Front ”
        and the posting by Paul Craig Roberts on Zero Hedge Jul 28, 2017 7:45 PM:
        –“Paul Craig Roberts Questions ‘What Really Explains’s Share Price?'”
        You’ll have to google them as some commenting systems don’t allow external links.

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