Ted Sarandos, co-CEO of Netflix.
Ernesto S. Ruscio | Getty Images
Netflix said on Tuesday that it plans to keep its cash flow neutral this year and positive each year after 2021, and will no longer need external financing to finance its operations, ending a decade-long trend and justifying investors who have invested money. in the company despite its cash burning methods.
Netflix also said it will consider repurchasing shares, a practice it has not done since 2011 – the last time the company had positive cash flow. The announcement came as part of Netflix’s earnings announcement, where the company also announced $ 1.19 EPS over fourth quarter revenue of $ 6.64 billion and 203.66 million global subscribers, up from 26 million at the end 2011. Shares rose about 10% in the news.
Over the past 10 years, Netflix has revolutionized the media industry by taking a leap of faith. It spent billions of dollars on licensed and original content each year to boost its catalog and, along the way, became a replacement product for traditional pay TV in millions of homes. Since 2011, Netflix has raised $ 15 billion in debt to help pay for that content. The company said it plans to pay off its outstanding debt that matures in 2021 with its more than $ 8 billion in cash.
Over the years, Netflix skeptics, like Wedbush analyst Michael Pachter, have pointed out that Netflix’s rising debt should be of concern to investors, as content spending has increased and the company has burned more money.
“Netflix has burned more money every year since 2013,” Pachter told CNBC in June 2018. “What happens when they need to keep increasing their spending and suddenly have $ 10 billion in debt? People are going to start to ask, ‘Can this company pay us back?’ If that happens, your loan rate will increase. If Netflix needs to raise capital, they will issue shares. And that’s where investors will be scared. “
But that did not happen. The cost of the original programming did not condemn the company. And Tuesday’s announcement suggests not. Meanwhile, with the growth of Netflix, the number of American homes with traditional pay TV has dropped from a peak of 100 million in 2012 to about 75 million today. Media executives are now planning a world in which that number will drop to between 50 million and 60 million in five years.
Netflix’s market capitalization in January 2011 was $ 11.5 billion. Today, it is more than $ 220 billion.
Pandemic quarantines drove Netflix’s return to positive cash flow. With production stalled amid coronavirus shutdown and people around the world trapped at home, Netflix added 36.57 million subscribers in 2020, spending less money on content than normal. Last year, Netflix reported positive quarterly free cash flow for three consecutive quarters for the first time since 2014.
The acceleration of subscribers and the subsequent movement of all media companies towards streaming gave CEOs Reed Hastings and Ted Sarandos the confidence that Netflix will be able to limit turnover and start making money consistently.
Netflix investor narrative
The unknown question is how investors will respond to the change in Netflix’s narrative. While operating a sustainable business without the need for external debt and share repurchases is “Business 101”, Netflix’s shares have soared as investors increasingly come to the conclusion that Netflix will deliver on that promise.
“We intend to be a much larger and much more profitable self-financing company over time,” said Hastings during Netflix’s first quarter 2019 earnings conference call. “This is the path we are taking. As we said in the letter, we are committed to significantly improving our cash flow profile, starting in 2020 and every year thereafter.”
As Netflix’s cash-burning days are behind us, it’s possible that Netflix needs a new narrative from Wall Street to convince investors that its future growth story is worthy of the company’s high valuation.
Perhaps this new narrative is the complete demise of pay TV with a streaming service package centered on Netflix. The entire entertainment industry has reorganized to prepare for such an occurrence, with each major media company developing its own streaming service in the past year or so.
But it is also possible that increased competition from Disney, Apple, WarnerMedia and others will stagnate the growth of Netflix subscribers. Investors can punish Netflix for repurchasing shares instead of using it to get more content. Investing activist Daniel Loeb pressured Disney to eliminate its dividends to focus more on the new original schedule.
If Netflix is choosing to use excess money for repurchases, it may be because Hastings and Sarandos think the company’s status – and the ability to raise prices in the future – is so strong that they can begin to transition the company. for a new, more mature phase without seeing a subsequent loss of value.
–Jessica Bursztynsky contributed to this report.