Investors had high expectations Netflixsay (NASDAQ: NFLX) earnings report fourth quarter this week. Although CEO Reed Hastings and his team warned three months ago about the slowdown in growth, the Q4 period usually brings a strong engagement as people watch more TV and upgrade their streaming equipment during the holidays.
Yet Netflix has bypassed the rising Wall Street targets and set a new annual growth record for 2020. The news was even better on the financial front, which looks set to include cash flow in the foreseeable future.
Let’s take a closer look.
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Not nearly finished growing
Netflix carried out the previous forecast from management, which required the addition of subscribers to 6 million. Its actual profit – 8.5 million – corresponds to the return of 8.8 million that the company achieved a year ago.
It was a welcome sight for investors worried that Netflix might be close to expanding its global business. Walt Disney built a large subscriber platform for its Disney + service in its first year, which could put the streaming leader under pressure in 2020.
Instead, Netflix added 37 million paying members in 2020 compared to the previous record of 29 million set in 2018. The users remained very engaged, with a flood of exclusive content that had massive viewers. The Midnight Sky, a movie that Netflix released during the period, attracted 72 million viewers in its first month. Management also said the series Bridgerton was ‘extremely popular’, while promising more detailed viewing statistics along the way.
Profits and cash
Netflix has tried to keep up with the rising profits through all the growth, but management has not been able to reinvest cash in the business fast enough. As a result, the operating margin increased by more than the long-term management goal of approximately 3% per annum, and it increased from 13% to 18% in 2020.
NFLX Cash from Operating Data (TTM) by YCharts
Cash flow was also strong, with an outflow of only $ 138 million for the quarter, which meant a positive $ 1.9 billion for the year. The result is in line with management’s forecast for the end of October, but the new outlook for Netflix makes it clear that the business is on an improved financial path.
Positive cash flow from here
Managers now believe they will reach the break-even flow in 2021 to release the company’s first year of borrowing needs since the original content push. Cash flow should improve from there using the gradually growing profitability and growing user base.
In the short-term forecast of Netflix, a sharp slowdown in subscribers is envisaged, as it will rise by the start of the COVID-19 exclusions from early 2019.
Managers implied significant direct cash returns from share buybacks, likely later in the year. But the bigger reasons for the shareholders’ celebration include the fact that Netflix has clearly established itself as the leader in a competitive industry that is likely to grow for many years to come.
Management has had to aggressively allocate cash since 2012 to protect and expand its valuable market position. But the big returns from these successes will appear in 2021 and beyond.