Opinion: Netflix removes one long-standing cloud for investors


Netflix Inc. had a couple of surprises in its record-breaking fourth quarter, including one that removed a long-hovering cloud for investors.

After surpassing Wall Street’s estimates for new subscriptions and posting one of its biggest quarters ever, the streaming giant told investors in its shareholder letter Tuesday that it is very close to becoming cash-flow positive.

“For the full year 2021, we currently anticipate free cash flow will be around break-even (vs. our prior expectation for -$1 billion to break even),” Netflix
said in its letter. And then came the really good news: “Combined with our $8.2 billion cash balance and our $750 million undrawn credit facility, we believe we no longer have a need to raise external financing for our day-to-day operations.”

Netflix’s indebtedness has long been a source of shareholder worry. The primary driver is its huge cost to develop or license original content. In the fourth quarter, the company said its current liabilities for content were $4.429 billion, up slightly from $4.413 billion in the year-ago quarter, while its non-content related liabilities came in at $2.6 billion this quarter.

Read more about Netflix’s content ambitions.

News that Netflix will no longer need to look for external financing for its operations, along with hitting a record of over 200 million total subscribers in the quarter, led to a 12% jump in its shares in after-hours trading. Another huge driver was the statement that Netflix is also considering stock buybacks.

“We have turned this corner where now we can, as we talked about, with $8 billion of cash on the balance sheet, projecting to be cash flow about break-even in 2021 and then positive thereafter,” Netflix Chief Financial Officer Spencer Neumann said in the company’s recorded interview. “We want to return excess cash to our shareholders, so we won’t build a bunch of excess cash.”

Investors have long been frustrated by the streaming giant’s huge need to spend voraciously to develop original content, but as new rivals jumped into the business, they overlooked their skepticism on the debt issue, as Netflix’s early business-model switch to streaming proved itself out.

Now, as Netflix is finally poised to fund its spending needs with cash from its operations, investors may move on to start worrying again about future subscriber growth. With more consumers than ever stuck at home as the pandemic continues, it may become harder and harder to find new subscribers.

When asked Tuesday by Barclays Capital analyst Kannan Venkateshwar for some comment on his estimates of subscriber growth going forward, Neumann was noncommittal. “Just as we talked about, there’s so much uncertainty in the business, we can provide a number but I’m not sure it would be worth it or bankable,” Neumann said. “It’s hard enough to project the next 90 days, let alone the next 12 months. But we feel very good about it as I said is that longer-term growth trajectory.”

But with its record number of subscribers, surely some investors will wonder if growth is peaking, along with the pandemic. If and when stay-at-home orders ease in the coming months, the big question remains: Will consumers watch fewer streamed movies and shows? And even if they don’t, Netflix still faces growing competition from rival services.

So while the biggest old issue for Netflix may be off the table, investors will still have something else to worry about.


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