July 14, 2020
Wedbush Securities media analyst Michael Pachter has long rebuffed conventional wisdom when it comes to Netflix. The Los Angeles-based analyst steadfastly considers the streaming behemoth’s excessive use of free cash an underling weakness in the Netflix story.
Free cash flow is often considered an important measurement since it outlines how effective a company is at generating enough cash after funding operations and capital expenditures to pay investors via dividends and share buybacks.
Netflix has consistently been in the red with available free cash, with Pachter projecting $1 billion negative FCF for the SVOD pioneer in the 2020 fiscal year.
But following a July 10-12 survey panel of 1,315 Americans on their current streaming and cable subscriptions, Pachter contends Netflix’s FCF situation is improving — albeit in the short term.
The analyst found that 50% of respondents cite Netflix as their favorite service, with 8% signing up for the first time in the past 90 days — a similar percentage of newbies resisted in Pachter’s previous survey in March.
“[It] suggests continued robust subscription growth,” Pachter wrote in a July 14 note.
Indeed, the analyst believes Netflix could report net sub additions of 15 million worldwide — up from Pachter’s estimated 7.9 million net sub additions. More importantly, the outsized sub growth could see a $250 million lift to FCF for the year.
“This would improve our estimated [Netflix FCF] loss of $1 billion (in-line with guidance for a $1 billion loss or better) to $750 million,” Pachter wrote, who added the improved economics portend other issues.
“We think the likely giant spike in new subscribers increases pressure on Netflix for retention.,” he wrote. “More consumption of content suggests even greater need to replace content with something new, and we expect spending and negative free cash flow to return to 2019 levels in 2021.”
Netflix reports second-quarter fiscal results July 16.