(Bloomberg) – Netflix Inc. ended its biggest year in the company’s history with a bang, taking its shares to a record high after adding more customers than expected and saying it no longer needs to borrow money to build its entertainment empire.
The world’s leading paid streaming service attracted 8.51 million new subscribers in the last three months of the year, helped by the popularity of hit shows like “Bridgerton” and “The Queen’s Gambit”. That surpassed Netflix’s own forecast and the 6.06 million projected by Wall Street, and its shares rose 15% – the highest since October 2016 – in Wednesday’s trading session.
The earnings report after Tuesday’s closing included two important milestones for Netflix: the company surpassed the 200 million subscriber mark for the first time and said its cash flow will allow it to stop relying on debt to feed its growth. With $ 8.2 billion in cash – and a credit line that has not been withdrawn – Netflix said it no longer needs external financing. It is also considering repurchasing shares, something that hasn’t happened in about a decade.
The pandemic has given Netflix a big boost, forcing people to join and limiting other entertainment options, like cinemas and shows. The company added 25.9 million customers in the first six months of last year and ended up adding 36.6 million customers in all – a record.
“It accelerated the big shift from linear entertainment to streaming,” said Spencer Neumann, the company’s chief financial officer, in a call with investors and analysts on Tuesday.
Netflix has repeatedly warned that the increase in the first half of 2020 would limit its growth in subsequent quarters – what it calls the “pull-forward” effect. Neumann warned that this will continue to affect growth in 2021, and Netflix has given a conservative estimate for the current quarter. It expects to add 6 million new subscribers in the period, compared to an average analyst estimate of 7.45 million.
But Netflix found more clues than expected in the last period.
Its growth over the past year has dispelled two common criticisms of the company. Netflix skeptics have long identified its debt as an impending disaster, arguing that an economic recession would hurt the company and cause customers to cancel subscriptions en masse.
Burning Money
Although Netflix has consistently reported profits, it has had to borrow billions of dollars to finance its spending on new programs. He had a negative free cash flow of $ 3.3 billion in 2019, the worst on record. Since then, it has turned a corner. Free cash flow will be close to breakeven in 2021, Netflix said on Tuesday. Analysts projected a negative $ 619.7 million. Against this backdrop, Netflix’s wave of debt looks like a worthwhile investment. It borrowed about $ 15 billion to increase its market capitalization by more than $ 200 billion.
Critics also argued that Netflix would suffer when rival media companies withdrew their most popular titles from the service and created their own competitors. Still, Netflix registered its best performance in the same year that several new competitors joined the fray and Disney + added 87 million paid subscribers.
What Bloomberg Intelligence says
“The big story was the free cash flow orientation for 2021 … We think this should put an end to bears’ worries about infinite cash consumption, especially after $ 3.3 billion in free cash flow losses in 2019. The narrative seems to have shifted directly to the operational leverage that Netflix has with its investments in global content ”.
–Geetha Ranganathan, senior media analyst
Click here to read the survey.
“Our strategy is simple: if we can continue to improve Netflix every day to better please our members, we can be your first choice for streaming entertainment,” the company said in a letter to shareholders. “The past year is proof of that approach.”
Netflix’s stock reached $ 577.77 in New York trading on Wednesday. Shares rose 67% last year, but concerns about slowing growth weighed on Netflix in 2021. Until Tuesday’s close, they have fallen 7.2% since the beginning of the year.
“Investors came out of the fourth quarter more and more optimistic about the potential for a powerful developing shareholder return story for Netflix in the coming years,” wrote Evercore ISI analyst Lee Horowitz in a note.
JP Morgan Securities analysts said the company is expected to start repurchasing shares in the second half of the year.
Global Service
Netflix, based in the city of Los Gatos, in Silicon Valley, California, is leaning more towards international markets now that its domestic market in North America is largely saturated. The service has relied on Europe and Latin America to supply most of its new customers in recent years and is just beginning to conquer Asia. More than 60% of its customers now live outside the United States and Canada, and 83% of its new additions in 2020 came from abroad. Europe supplied 41% of its new customers – almost 15 million people – while Asia added 9.3 customers, the second largest.
Netflix has thrived by creating channels for new shows from around the world that attract viewers outside the native language. Only in the fourth quarter, Netflix released popular series in German, Korean, Japanese and French.
The English “Queen’s Gambit” and “Bridgerton” were the biggest hits of Netflix. “Queen’s Gambit” was seen by 62 million families in their first 28 days on the job, while “Bridgerton” is on track to reach 63 million accounts.
But a more recent program, released this month, highlights Netflix’s global reach. “Lupine”, a French police series starring Omar Sy, became the second biggest debut in the company’s history. He is on his way to be watched by 70 million families in the first 28 days of service.
This diversity of programs is what will help Netflix continue to grow, both at home and abroad, in the face of growing competition.
“We are still a very small share of pay TV penetration in most markets around the world and a small share of the audience,” said Neumann.
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