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

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

Netflix also said it would consider repurchasing shares, a practice it has not done since 2011 – the last time the company had a positive cash flow. The announcement came as part of Netflix’s earnings announcement, where the company also announced $ 1.19 billion in revenue for $ 6.64 billion for the fourth quarter and 203.66 million global subscribers, up front of 26 million at the end of 2011. Shares increased by about 10% on news.

For the past 10 years, Netflix has turned the media industry upside down. It has spent billions of dollars on licensed and original content every year to improve its catalog and, over time, has become a substitute for traditional pay-TV in millions of households. Since 2011, Netflix has raised $ 15 billion in debt to help pay for this content. The company has said it intends to repay its outstanding debt, which falls in 2021, to more than $ 8 billion in cash.

Over the years, Netflix skeptics, such as Wedbush analyst Michael Pachter, have pointed out that Netflix’s debt growth should be a concern for investors, as content spending has risen 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 continue to increase their spending and suddenly have $ 10 billion in debt? People will start asking, “Maybe this company? are you paying us back? If this happens, their loan rate will increase. If Netflix needs to raise capital, they will issue shares. And then investors will be scared. “

But that didn’t happen. The cost of the original appointment did not condemn the company. And Tuesday’s announcement suggests it won’t be. Meanwhile, as Netflix has grown, the number of American households 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 of between 50 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 triggered Netflix’s return to a positive cash flow. With production shut down due to coronavirus shutdowns and people around the world stuck at home, Netflix added 36.57 million subscribers in 2020, while spending less money than content. Last year, Netflix reported a positive quarterly free cash flow for three consecutive quarters for the first time since 2014.

The acceleration of subscribers and the subsequent move of all media companies to streaming gave CEOs Reed Hastings and Ted Sarandos confidence that Netflix will be able to limit the churn and start making money constantly.

The unknown question is how investors will respond to the changing Netflix narrative. While conducting a sustainable business without the need for external debt repayments and shares is “Business 101”, Netflix shares have grown as investors increasingly come to the conclusion that Netflix would keep that promise.

“We intend to be a much larger and more profitable self-financing company over time,” Hastings said during the Netflix call conference in the first quarter of 2019. “This is the path we are following. we are committed to significantly improving our cash flow profile, starting in 2020 and then every year thereafter. “

With Netflix’s cash-burning days behind it, Netflix may need a new Wall Street narrative to convince investors that the future growth story is worthy of the company’s top valuation.

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

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

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

–Jessica Bursztynsky contributed to this report.