January 20, 2021
As expected, Netflix shares opened Jan. 20 up nearly 14% to a record $573.43 per share following the previous day’s 2020 fiscal report that underscored the the streaming behemoth’s market dominance. The service saw a record 37 million new subscribers, record revenue of nearly $30 billion and profit of $2.76 billion.
The SVOD topped 203 million paid subscribers for the first time, driven by a global market eager to consume content at home during the ongoing pandemic. Nowhere was that more prevalent than in North America — Netflix’s first and most-saturated market. The streamer added more than 850,000 subs in the U.S. and Canada — well above the projected 300,000+ subs.
“Importantly, while Netflix beat subscriber expectations in all major territories, Netflix’s most mature market U.S./Canada reported materially better than expected, which highlights that the ultimate penetration for Netflix’s services globally could be higher than anticipated,” analyst Jeff Wlodarczak with Pivotal Research Group wrote in a note.
Moving past the headlines, Netflix appeared to turn the page on what has always rankled some on Wall Street: free cash flow, or the cash left over after a company pays for its operating expenses and capital expenditures. Netflix historically has operated in the red, to the tune of $1 billion or more.
But in its fiscal 2021 guidance, Netflix said cash flow is moving toward a breakeven level at around $1 billion, an impressive turnaround driven in part by reduced spending due to the ongoing pandemic. Then the kicker: Netflix believes it no longer needs to raise external financing for day-to-day operations.
“Netflix has been working toward this moment for multiple years, and is now in the unique position to continue its aggressive content spend, while still generating significant future cash flows,” Jefferies analyst Alex Giaimo wrote in a separate note.
Longtime Netflix bear Wedbush Securities media analyst Michael Pachter, in a Jan. 20 note, said service “has consistently surprised us” by keeping its foot on the gas pedal for subscriber growth, while benefiting from a disruption in production to generate positive free cash flow.
“While we are far more constructive about Netflix than we have been at any point in nearly a decade, we continue to question its valuation,” Pachter wrote.
The analyst lauded Netflix’s pledge to be free cash flow positive through 2030. Rather than continuing to borrow to finance its content needs, Pachter said it has become clear that Netflix has reached a point where it can maintain a healthy balance sheet and finance operations from operating cash flow. He still contends the stock remains overvalued.
“We have been consistently wrong about Netflix, but optimism about the company’s potential to generate free cash flow growth of more than $1 billion per year seems to us to be misplaced,” Pachter wrote.