After adding more customers than expected, Netflix Inc. ended its biggest year in company history with a bang, powering its stock to a record high and saying it no longer needs to borrow money to build its entertainment empire
After adding more clients than expected, Netflix Inc. ended its largest year in company history with a bang, powering its stock to a record high and saying it no longer needs to borrow money to build its entertainment empire.
In the final three months of the year, the world’s leading paid streaming service attracted 8.51 million new subscribers, helped by the popularity of hit shows such as “Bridgerton” and “The Queen’s Gambit.” That outpaced Netflix’s own forecast and Wall Street’s 6.06 million forecasts, and its shares rose 15 percent in Wednesday trading, the most since October 2016.
Two major milestones for Netflix were included in the earnings report after Tuesday’s close: the company passed the 200 million-subscriber mark for the first time and said its cash flow would allow it to stop relying on debt to boost its growth. Netflix said it no longer wants foreign funding, with $8.2 billion in cash — and a credit line that has not been drawn down. Stock buybacks are also being discussed, which it hasn’t done in about a decade.
The pandemic has given Netflix’s company a massive boost, driving people indoors and restricting other entertainment outlets, such as movie theaters and concerts. In the first six months of last year, the company added 25.9 million customers and ultimately added 36.6 million customers in total — a record.
The big change from linear to streaming entertainment has accelerated,” Spencer Neumann, the chief financial officer of the company, said Tuesday on a call with investors and analysts.”
Netflix has consistently cautioned that the rise in the first half of 2020 will restrict its growth in subsequent quarters—what it calls the “pull-forward” effect. Neumann warned that this will continue to impact growth in 2021, and Netflix provided a cautious forecast for the current quarter. Compared to an average analyst estimate of 7,455 analysts, it expects to add 6 million new subscribers in the timeframe.
But in the latest era, Netflix found more runways than expected.
Two common criticisms of the company were dispelled by its development over the past year. Netflix skeptics have long recognized its debt as a looming catastrophe, claiming that an economic recession would cripple the business and force clients to cancel subscriptions en masse.
While Netflix has consistently posted income, to finance its spending on new shows, it had to borrow billions of dollars. In 2019, it had $3.3 billion of negative free cash flow, the worst on record. Since then, a corner has been turned. Netflix said Tuesday that free cash flow will be at the break-even point in 2021. A negative $619.7 million was expected by analysts. Netflix’s debt binge seems like a worthwhile gamble against the context. To raise its market capitalization by more than $200 billion, it has borrowed around $15 billion.
Critics have also claimed that if competing media firms removed their most popular titles from the service and developed their own rivals, Netflix would suffer. Yet, in the same year that many new entrants joined the fray, Netflix reported its best results yet and Disney+ added 87 million paying subscribers.
What Intelligence from Bloomberg Says
“The bigger story was the 2021 free-cash-flow guidance… We believe this could put an end to the fears of bears about endless cash burning, especially after losses of $3.3 billion in 2019 free-cash-flow. The narrative seems to have turned squarely to the operating leverage that Netflix has through its global content investments.
—Geetha Ranganathan, senior analyst in the media
“Our strategy is simple: if we can continue to enhance Netflix every day to delight our members better, we can be their first choice for entertainment streaming,” the company said in a letter to shareholders. “This is a testament to this strategy last year.”
In New York trading Wednesday, Netflix shares soared as high as $577.77. Last year, the stock grew by 67 percent, but worries about declining growth weighed on Netflix in 2021. It was down 7.2 percent from the start of the year through Tuesday’s end.
“Investors are increasingly more bullish about the potential of a strong evolving shareholder return story for Netflix in the coming years from the fourth quarter,” Evercore ISI analyst Lee Horowitz wrote in a note.
The business is expected to launch share buybacks in the second half of the year, analysts at J.P. Morgan Securities said.