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

Netflix said Tuesday that it plans to be cash-flow neutral this year and positive cash flow every year after 2021, eliminating the need for external funding to fund its operations, ending a decade-long trend, and investing money. plowing in the world justifies. company despite its money-burning ways.

Netflix also said it will consider share buybacks, a practice it hasn’t done since 2011 – the last time the company was cash-flow positive. The announcement came as part of Netflix’s earnings announcement, where the company also announced earnings per share of $ 1.19 on fourth-quarter revenues of $ 6.64 billion, and 203.66 million subscribers worldwide, against 26 million. end of 2011. Shares rose by approximately 10%. On the news.

For the past 10 years, Netflix has turned the media industry upside down by taking a leap of faith. It has spent billions of dollars each year on licensed and original content to boost its catalog, gradually turning it into a replacement product 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 matures 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 a concern for investors as content spending spiked and the company burned more money.

“Netflix has burned more money every year since 2013,” Pachter told CNBC in June 2018. What if they have to keep increasing their spending and suddenly have $ 10 billion in debt? People start asking, ‘Can this company? Pay us back?’ When that happens, their lending rates will go up. If Netflix has to raise capital, they will. issue shares. And then investors will be scared. “

But that did not happen. The cost of the original programming has not doomed the company. And Tuesday’s announcement suggests not. As Netflix has grown, the number of American households with traditional pay TV has fallen from a peak of 100 million in 2012 to about 75 million today. Media executives are now planning a world where that figure will be between 50 million and 60 million in five years.

Netflix’s market cap in January 2011 was $ 11.5 billion. Today it is more than $ 220 billion.

Pandemic quarantines have accelerated Netflix’s return to positive cash flow. As production came to a halt due to the coronavirus shutdown and people around the world stayed 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 subscriber numbers and the subsequent move of all media companies toward streaming has given CEOs Reed Hastings and Ted Sarandos confidence that Netflix will be able to limit churn and start making money consistently.

The unknown question is how investors will react to the change in Netflix’s story. While running a sustainable business without the need for external debt and buying back its own stock is “Business 101,” Netflix’s share has grown as investors increasingly conclude that Netflix would deliver on that promise.

“We plan to become a much larger and much more profitable self-financing company over time,” Hastings said during Netflix’s Q1 2019 conference call. “That’s the path we are taking. discussed the letter, we are committed to meaningfully improving our cash flow profile, starting in 2020 and every year thereafter. ”

As Netflix’s money-burning days are behind it, Netflix may need a new Wall Street narrative to convince investors that its future growth story is worthy of the company’s high valuation.

Perhaps that new story is the complete overthrow of pay TV with a Netflix-centered bundle of streaming services. The entire entertainment industry has reorganized to prepare for such an event, with every major media company developing its own streaming service over the past year.

But it’s also possible that increasing competition from Disney, Apple, WarnerMedia and others will stagnate Netflix’s subscriber growth. Investors could penalize Netflix for buying back shares instead of using it for more content. Activist investor Daniel Loeb has pushed Disney to cut its dividends and focus more on new original programming.

If Netflix chooses to use excess cash for buybacks, Hastings and Sarandos may think the company’s status – and its ability to raise prices in the future – is so strong that they can begin the transition from the company to a new, more mature phase without seeing a later loss in value.

–Jessica Bursztynsky contributed to this report.