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

Netflix said on Tuesday it plans to be cash flow neutral this year and positive every year after 2021, and will no longer need external funding to fund its operations, which will put an end to a ten-year trend and investors who make money in the company despite its cash-burning methods.

Netflix also said it would consider repurchasing shares, which has not been done since 2011 – the last time the company was cash-flow positive. The announcement comes as part of the Netflix earnings announcement, where the company also announced a profit of $ 1.19 on revenue of $ 6.64 billion for the fourth quarter and 203.66 million global subscribers, compared to 26 million at the end of 2011. The shares rose by about 10% on the news.

Over the past ten years, Netflix has boosted the media industry by taking a leap of faith. It has spent billions of dollars annually on licensed and original content to promote the catalog, and along the way has become a replacement product 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 said it plans to repay its outstanding debt, which expires in 2021, with more than $ 8 billion in cash on hand.

Over the years, Netflix skeptics, such as Wedbush analyst Michael Pachter, have pointed out that Netflix’s growing debt burden should be of concern to investors as spending on content balloons and burns the company more cash.

“Netflix has been burning more cash annually since 2013,” Pachter told CNBC in June 2018. “What happens if they have to keep increasing their expenses and suddenly have $ 10 billion in debt? People are going to start asking, ‘Can this company pay back?’ If that happens, their lending rate will go up. If Netflix has to raise capital, they will issue shares. And then investors will get scared. ‘

But that did not happen. The cost of original programming did not doom the company. Tuesday’s announcement indicates that will not happen. While Netflix has grown, the number of American households with traditional pay-TV has meanwhile dropped from a peak of 100 million in 2012 to about 75 million today. Media executives are now planning for a world where the figure drops between 50 and 60 million within five years.

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

Quarantines for pandemic launched Netflix’s return to positive cash flow. With production halted amid coronavirus shutdown and people around the world sitting at home, Netflix added 36.57 million subscribers in 2020, spending less money on content than usual. Last year, for the first time since 2014, Netflix reported positive free cash flow three times in a row.

The acceleration of subscribers and the subsequent move of all media companies towards streaming has given CEOs Reed Hastings and Ted Sarandos the confidence that Netflix will be able to limit the scope and consistently make money.

The unknown question is how investors will react to the change in Netflix’s story. While operating a sustainable business without having to repurchase external debt and shares is ‘Business 101’, Netflix’s share has risen as investors increasingly came to the conclusion that Netflix would deliver on its promise.

“We aim to be a much larger and much more profitable self-financing business over time,” Hastings said during Netflix’s first-quarter revenue in 2019 in the first quarter. “This is the path we are on. As we said in the letter, we are committed to significantly improving our cash flow profile, from 2020 and then every year thereafter.”

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

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

But it is also possible that the growing competition from Disney, Apple, WarnerMedia and other Netflix’s growth in subscribers could stagnate. Investors could penalize Netflix for buying back shares instead of using them for more content. Activist investor Daniel Loeb has urged Disney to eliminate its dividend and focus more on new original programming.

If Netflix prefers to use excess cash for repurchases, it could be because Hastings and Sarandos think the company’s status – and the ability to raise prices in the future – is so strong that they’re turning the business into a new, more mature phase without seeing a subsequent loss of value.

–Jessica Bursztynsky contributed to this report.