Netflix announced Tuesday it ended 2020 with more than 200 million global subscribers and that it was “very close” to being permanently “free cash flow positive,” The Information reports.
Why It Matters: Reaching 200 million is an incredible milestone and maintains Netflix’s position of dominance in the streaming world. But even more important could be the cash flow news. Netflix has traditionally relied on its roughly $16 billion debt load to “fund an annual cash shortfall that in recent years was several billion dollars. The news means Netflix “no longer [has] a need to raise external financing for our day to day operations.”
Numbers To Consider:
- Netflix added 8.51 million new subscribers in the fourth quarter, lifting its total to 203.66 million.
- The streaming giant also announced it had roughly $8.2 billion in cash and expects to “break-even” in cash this year.
A Step Further: Netflix’s strategy has revolved around ramping up its TV and film content production aggressively — it plans to release more than 70 new films this year. Although Netflix was reporting net income at some points, its cash burn from presumably its high content costs restricted its ability to make money, and the company turned to outside financing to fund new projects.
What’s Ahead: To prove its point, Netflix said it intends to repay $500 million in debt that comes due next month with cash. It will also keep debt levels flat and explore stock buybacks for the first time since 2011.
Netflix ($NFLX) has popped 14% on their killer Q4 subscriber growth numbers and is now trading at $571.95 per share. Here’s an excerpt from a premium research post about exclusive to ROIC members that I posted on December 22, 2020.
But we also believe that analyst estimates may be underestimating growth in the next 12-24 months.
- As the premier streaming utility, Netflix has very good pricing power and will increase prices globally, which will boost growth even as member growth tapers off.
- Recent price increases in Canada and Australia might signal near-term price increases in other markets including the U.S.
We are putting a 1-year price target of $560 per share on Netflix ($NFLX) based on higher growth and margin estimates in 2021 and 2022 than consensus. Given this only represents a 7% upside to where $NFLX is trading today at $523, we think there are more attractive stocks in the space to allocate capital to, but we will be on the lookout for buying opportunities upon weakness.