(Bloomberg) – Netflix Inc. ended its biggest year in company history with a bang and raised its shares to a record high after adding more customers than expected, saying it no longer needed to borrow money to build its entertainment empire.
The world’s leading paid streaming service has attracted 8.51 million new subscribers in the last three months of the year, helped by the popularity of hit programs such as ‘Bridgerton’ and ‘The Queen’s Gambit’. This is better than Netflix’s own forecast and the 6.06 million that Wall Street predicts, and its shares rose 15% – the most since October 2016 – in Wednesday’s trading.
The earnings report after Tuesday contained two key milestones for Netflix: the company reached the 200 million subscriber mark for the first time, saying its cash flow would allow it to rely on debt to boost its growth. With $ 8.2 billion in cash – and a line of credit not withdrawn – Netflix said it no longer needed external funding. It is also considering buying back shares, something it has not done in about a decade.
The pandemic has given a big boost to Netflix’s business, restricting people and restricting other entertainment options such as movie theaters and concerts. The company added 25.9 million customers in the first six months of last year and eventually added 36.6 million customers – a record.
“The huge shift from linear to streaming entertainment is accelerating,” the company’s chief financial officer Spencer Neumann said Tuesday in a call with investors and analysts.
Netflix has repeatedly warned that the boom in the first half of 2020 will limit its growth in subsequent quarters – what he calls the ‘pull-forward’ effect. Neumann has warned that it will affect growth in 2021, and Netflix has given a conservative estimate for the current quarter. 6 million new subscribers are expected to pick up in the period, compared to an average analyst estimate of 7.45 million.
But Netflix has found more runways than expected in recent times.
The growth in the past year has eliminated two general criticisms of the company. Netflix skeptics have long identified its debt as a looming disaster, arguing that an economic recession would cripple the company and that customers would cancel the subscriptions en masse.
Cash burned
While Netflix consistently made a profit, it had to borrow billions of dollars to finance its spending on new programs. It had a negative free cash flow of $ 3.3 billion in 2019, which was the worst on record. Since then, it has made a comeback. Free cash flow will be near the break-even point in 2021, Netflix said Tuesday. Analysts forecast negative $ 619.7 million. Against this backdrop, Netflix’s debt seems to be a worthy investment. It borrowed about $ 15 billion to increase its market capitalization by more than $ 200 billion.
Critics have also argued that Netflix will suffer if competing media companies take their most popular titles off the service and create their own competitors. Yet Netflix had its best performance to date in the same year that several new competitors took the fight and added Disney + 87 million paid subscribers.
What Bloomberg Intelligence says
‘The bigger story was the guidelines for free cash flow for 2021 … We think it should put an end to the concern about endless cash burning, especially after $ 3.3 billion in free cash flow losses in 2019. The narrative seems square moved to the industry-leading financing that Netflix has with its investments in global content. ”
–Geetha Ranganathan, senior media analyst
Click here to read the research.
“Our strategy is simple: if we can continue to improve Netflix every day to better entertain our members, we can be their first choice for the stream of entertainment,” the company said in a letter to shareholders. “The past year is proof of this approach.”
Netflix shares climbed to $ 577.77 in New York on Wednesday. The stock rose 67% last year, but concerns about slowing growth outweighed Netflix in 2021. By the end of Tuesday, it had been down 7.2% since the beginning of the year.
“Investors are increasingly positive about the potential of a powerful evolving return story for Netflix in the coming quarters in the coming quarter,” Evercore ISI analyst Lee Horowitz wrote in a note.
Analysts at JP Morgan Securities said the company is likely to start repurchasing shares in the second half of the year.
Global service
Netflix, based in the city of Los Gatos, California, in Silicon Valley, relies more on international markets now that its home market in North America is largely saturated. The service has relied on Europe and Latin America for the past few years to cater to most of its new customers, and it has just begun to crack in Asia. More than 60% of its customers now live outside the US and Canada, and 83% of its new additions in 2020 come from abroad. Europe delivered 41% of its new customers – almost 15 million people – while Asia added 9.3 customers, the second most.
Netflix has thrived by creating pipelines of new programs from around the world that appeal to viewers outside the native language. Just in the fourth quarter, Netflix released popular series in German, Korean, Japanese and French.
The English “Queen’s Gambit” and “Bridgerton” were both big hits for Netflix. ‘Queen’s Gambit’ was viewed by 62 million households on the service in the first 28 days, while ‘Bridgerton’ is on track to reach 63 million accounts.
But a newer program, released this month, highlights Netflix’s worldwide reach. ‘Lupine’, a French crime series starring Omar Sy, became the second biggest debut in the company’s history. It is on track to track through the 70 million households during the first 28 days of service.
This variety of programs is what will help Netflix grow, both at home and abroad, in the face of increasing competition.
“We are still a very small part of even just pay-TV penetration in most markets around the world and a small part of watching,” Neumann said.
(Shares updates from first paragraph.)
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