Netflix said Tuesday it plans to be cash-flow neutral this year and cash-flow positive every year after 2021, and will no longer need external financing to fund its operations, ending a decade-long trend and vindicating investors who have plowed money into the company despite its cash-burning ways.
End Of Cash-Burning Spree
Netflix also said it will consider share buybacks, a practice it hasn’t done since 2011 — the last time the company was cash-flow positive. The announcement came as part of Netflix’s earnings announcement, where the company also announced EPS of $1.19 on revenues of $6.64 billion for the fourth quarter, and 203.66 million global subscribers, up from 26 million at the end of 2011. Shares were up about 10% on the news.
For the past 10 years, Netflix has upended the media industry by taking a leap of faith. It has spent billions of dollars on licensed and original content each year to boost its catalog, and along the way morphed into 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 pay back its outstanding debt that matures in 2021 with its more than $8 billion of cash on hand.
Over the years, Netflix skeptics, such as Wedbush analyst Michael Pachter, have pointed out that Netflix’s increasing debt load should be concerning for investors as content spending ballooned and the company burned more cash.
Impact Of Pandemic
“Netflix has burned more cash every year since 2013,” Pachter told CNBC in June 2018. “What happens when they need to keep increasing their spending and suddenly they have $10 billion of debt? People are going to start asking, ‘can this company pay us back?’ If that happens, their lending rate will spike. If Netflix needs to raise capital, they’ll issue stock. And that’s when investors will get spooked.”
But that hasn’t happened. The cost of original programming hasn’t doomed the company. And Tuesday’s announcement suggests it won’t. Meanwhile, as Netflix has grown, the number of U.S. 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 for a world where that figure falls to between 50 million and 60 million in five years.
Netflix’s market capitalization in Jan. 2011 was $11.5 billion. Today, it’s more than $220 billion.
Pandemic quarantines have jump-started Netflix’s return to positive cash flow. With production stalled amid coronavirus shutdowns and people around the world stuck at home, Netflix added 36.57 million subscribers in 2020 while spending less money on content than usual. Last year, Netflix reported positive quarterly free cash flow for three consecutive quarters for the first time since 2014.
The acceleration in subscribers and subsequent movement of all media companies toward streaming has given CEOs Reed Hastings and Ted Sarandos confidence that Netflix will be able to limit churn and start consistently making money.
- Netflix said Tuesday it will be cash-flow positive after 2021 and around break even with cash flow in this year.
- The company said it doesn’t intend to need any more outside financing after borrowing $15 billion since 2011.
- Netflix will consider share buybacks, which it hasn’t done since 2011.
- The announcements validate Netflix’s long-term strategy of spending billions of dollars each year on content to entice subscribers.