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

Netflix said Tuesday that it plans to be neutral this year and have a positive cash flow every year after 2021, and that it will no longer need external funding to fund its operations, ending a ten-year trend and vindicating investors who have put money company despite its ways of burning money.

Netflix also said it will consider stock rewards, a practice it hasn’t done since 2011, the last time the company had a positive cash flow. The announcement was made as part of Netflix’s earnings announcement, where the company also announced $ 1.19 million in revenue for $ 6.646 billion for the fourth quarter and 203.66 million global subscribers, compared to 26 million at the end of 2011. Shares increased by about 10%. in the news.

For the past ten years, Netflix has revalued the media industry by making a leap of faith. It has spent billions of dollars each year on licensed original content to expand its catalog and, along the way, has become 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 expires in 2021 with its more than $ 8 billion in cash.

Over the years, Netflix skeptics, such as Wedbush analyst Michael Pachter, have pointed out that increasing Netflix’s debt burden should be worrisome for investors as content spending increased and the company burned more money.

“Netflix has burned more money every year since 2013,” Pachter told CNBC in June 2018. “What happens when they have to keep increasing their spending and suddenly have ten million dollars? People will start asking,” can this company? do you pay us If this happens, your loan rate will increase. If Netflix needs to raise capital, they will issue shares. And that’s when investors will be scared. “

But this has not happened. The cost of the original programming has not condemned the company. And Tuesday’s announcement suggests he won’t. Meanwhile, as Netflix has grown, the number of American households with traditional pay-TV has dropped from a high of $ 100 million in 2012 to about $ 75 million today. Media executives are now planning a world where that figure is between 50 and 60 million in five years.

Netflix’s market capitalization in January 2011 was $ 11.5 billion. Today it exceeds $ 220 billion.

Pandemic quarantines have driven Netflix’s return to positive cash flow. With production stalled amid coronavirus outages and people around the world trapped at home, Netflix added 36.57 million subscribers in 2020 while spending less money on content than usual. 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 consequent movement of all media companies towards streaming has given CEOs Reed Hastings and Ted Sarandos confidence that Netflix will be able to limit dropouts and start making money constantly.

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 rewards and stocks is “Business 101,” Netflix shares have risen as investors have come to the conclusion that Netflix would live up to that promise.

“We intend to be a much larger, much more profitable self-financing company over time,” Hastings said during Netflix’s first quarter 2019 earnings conference call. “This is the path we are on. As we spoke in the letter, 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 its future growth story is worthy of the company’s high valuation.

Perhaps this new narrative is the complete overthrow of pay-TV with a Netflix-centric streaming service package. The entire entertainment industry has been reorganized to prepare for this occurrence, with major media companies having developed their own broadcast service over the last year or so.

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

If Netflix chooses to use the excess cash for repurchases, Hastings and Sarandos may think the company’s status – and ability to raise prices in the future – is so strong that they may begin to transfer the company to a new mature phase without seeing a subsequent loss of value.

–Jessica Bursztynsky contributed to this report.