Netflix says its cash flow is positive after 2021, no more external funding

Netflix said on Tuesday that it plans to be cash neutral this year and positive cash flow every year after 2021, and that it will no longer need external funding to fund its operations, ending a trend of a decade and justifying the investors who invested money in the company despite its means to burn money.

Netflix has also said it will consider share buybacks, a practice it hasn’t done since 2011 – the last time the company had positive cash flow. The announcement is part of Netflix’s earnings announcement, where the company also announced EPS of $ 1.19 on fourth quarter revenue of $ 6.64 billion and 203.66 million global subscribers, up from 26 million at the end of 2011. Shares are up about 10% on news.

Over the past 10 years, Netflix has shaken up the media industry by taking a leap of faith. It has spent billions of dollars on original and licensed content each year to enrich its catalog and has turned into a substitute for traditional pay TV in millions of homes. Since 2011, Netflix has raised $ 15 billion in debt to help pay for this content. The company said it plans to repay its outstanding debt that will fall due in 2021 with more than $ 8 billion in cash.

Over the years, Netflix skeptics such as Wedbush analyst Michael Pachter have pointed out that Netflix’s growing indebtedness should be of concern to investors as spending on content skyrockets and the company burns more. ‘silver.

“Netflix has burned more cash every year since 2013,” Pachter told CNBC in June 2018. “What happens when they have to keep ramping up their spending and suddenly have $ 10 billion in debt? People are going to start asking, ‘Can this company pay us back? If that happens, their lending rate will skyrocket. If Netflix needs to raise capital, it will issue shares. And that’s it. that investors will be scared. “

But that did not happen. The cost of the original programming did not doom the company. And Tuesday’s announcement suggests not. Meanwhile, as Netflix has grown, the number of American homes with traditional pay-TV has grown from a high of 100 million in 2012 to around 75 million today. Media officials now envision a world where 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’s over $ 220 billion.

Pandemic quarantines have reignited Netflix’s return to positive cash flow. With production stalled amid coronavirus shutdowns and people around the world stranded at home, Netflix added 36.57 million subscribers in 2020 while spending less money on content than usual. Last year, Netflix reported positive quarterly free cash flow for three consecutive quarters for the first time since 2014.

The acceleration in the number of subscribers and the subsequent move of all media companies to streaming has given CEOs Reed Hastings and Ted Sarandos confidence that Netflix will be able to limit the churn rate and start earning steadily. money.

The unknown question is how investors will react to the change in Netflix’s narrative. While running a sustainable business without the need for foreign debt and share buybacks is “Business 101,” Netflix stock has risen as investors increasingly come to the conclusion that Netflix will hold this promise.

“We intend to be a much bigger and much more profitable self-funded company over time,” Hastings said on Netflix’s first quarter 2019 earnings conference call. “This is the path we are on. As we discuss in the letter, we are committed to improving our cash flow profile significantly, starting in 2020 and each year thereafter.”

With Netflix’s cash-consuming days behind it, it’s possible that Netflix needs a new Wall Street narrative to convince investors that its future growth is worthy of the company’s high valuation.

Perhaps this new narrative will be the complete overthrow of pay TV with a Netflix-centric set of streaming services. The entire entertainment industry has reorganized to prepare for such an event, with each major media company developing its own streaming service in the past year or so.

But it’s also possible that growing competition from Disney, Apple, WarnerMedia and others will stall the growth of Netflix subscribers. Investors could punish Netflix for share buybacks instead of using it for more content. Activist investor Daniel Loeb has pushed Disney to eliminate its dividend to focus more on original new programming.

If Netflix chooses to use the excess cash for buyouts, it may be because Hastings and Sarandos believe the company’s status – and its ability to raise prices in the future – is so strong. that they can begin to make the business transition into a new, more mature business without seeing any subsequent loss of value.

–Jessica Bursztynsky contributed to this report.