Netflix
pointed out in its fourth-quarter earnings letter that the company’s shares have returned more than 50,000% since their initial public offering in May 2002. That is about 125 times higher than the 400% the
S&P 500
has recorded over the same period.
Analysts are falling over themselves to say that there is more where that came from. The shares were up 14.6% to $574.83 on Wednesday morning, and traded as high as $577.77, a record.
The streaming giant on Tuesday provided what is likely to be one of the rare quarterly earnings reports that have lasting effects on investors’ long-term thinking. In particular, Netflix made it clear that it has now piled up enough subscribers—more than 200 million—with enough average monthly revenue from each (just over $11) to make the company self-sustaining. Netflix expects to break even in terms of cash flow in 2021, even with the promise of launching at least one new movie every week through the end of the year and beyond.
The company, which has about $16 billion in debt on the books, said it can now finance operations without borrowing. Netflix will pay down $500 million of debt coming due next month from cash on hand. After that, it said, it may use excess cash to buy back stock, for the first time since 2011.
The comments on cash flow no doubt stunned those who have been downbeat on the stock, saying the company wouldn’t ever have enough self-generated cash to sustain its ambitious production schedule. Those bears were dead wrong about that, and more.
For instance, Netflix added 8.51 million net new subscribers in the quarter, blowing past both its own forecast of 6 million additions and more optimistic estimates from Wall Street. That’s an impressive rebound from a disappointing 2 million subscriber additions in the third quarter.
There have been concerns that the company’s huge growth earlier in the year as the pandemic-triggered shutdown unfolded was stealing subscribers from the future. Instead, it seems that growth has simply been accelerated. Netflix expects to add another 6 million subscribers in the first quarter.
The naysayers also thought that Netflix was going to suffer from the rollout of new streaming services like
Disney
+, HBO Max, Peacock, and
Apple
TV+. But rather than hurting Netflix, the addition of new streaming services seems to have reinforced the shift among consumers away from the real loser in this equation: the traditional cable and satellite pay TV services.
Both the reported results and the company’s forecasts for the March quarter were solid. For the December quarter, Netflix posted revenue of $6.6 billion, in line with estimates, with profits of $1.19 a share, short of its own forecast of $1.35 a share, largely because of a noncash foreign- exchange charge related to the company’s euro-denominated debt.
For the March quarter, Netflix sees revenue of $7.1 billion, close to the previous Wall Street analyst consensus call for $7 billion. Management anticipates earnings of $2.97 a share, way above the Street’s forecast of $2.10. Operating margin in the March quarter will jump to 25%, from 16.6% a year ago and 14.4% in the fourth quarter, according to Netflix.
At least 17 analysts raised their price targets on Netflix shares on Wednesday. Formerly cautious analysts at UBS and Wells Fargo threw in the towel and upgraded the stock to Buy and Overweight, respectively.
Morgan Stanley analyst Benjamin Swinburne repeated his Overweight rating, raised his target price to $700, from $650, and exulted that his primary thesis on Netflix is playing out. “We have long believed that as the business scaled and its transition to self-produced content played out, this business would move to sustained and substantial annual free cash flow,” he wrote. “That moment has arrived.”
But Swinburne noted that the shift to positive free cash flow does not suggest a maturing business. In fact, he thinks the company’s spending on content will likely increase more than 40% in 2021 from the level seen in 2020 as a result of the pandemic, leaving it 20% higher than in 2019. Meanwhile, he sees revenue growing about 20% in 2021.
“We particularly expect continued substantial incremental investment in film output and foreign local originals over the next several years,” he wrote.
The Morgan Stanley analyst said Netflix is among the world’s largest investors in entertainment programming, and may become the clear No. 1 several years from now. Longer term, he says, it would not be surprising if Netflix moves more openly into new markets, like live sports, or if it takes “a more opportunistic approach” to acquisitions. But for now, he sees extra cash going back to shareholders.
Pivotal Research analyst Jeffrey Wlodarczak reiterated his Buy rating, raising his target price to $750, the highest on the Street, from $660. Among other things, the analyst said, the company gained more subscribers than expected in all major geographies, including a net increase of 900,000 in the U.S. and Canada, where he had been expecting just 375,000 net adds. He says the data suggests that the ultimate penetration rate for Netflix services globally could be higher than investors previously had been anticipating.
“Netflix offers consumers an increasingly compelling unique entertainment experience on virtually any device, without commercials at a still relatively low cost,” the Pivotal analyst wrote. “The company appears to operate in a virtuous cycle, as the larger their subscriber base grows the more they can spend on original content, which increases the potential target market for their service and enhances their ability to take future price increases and dramatically increases barriers to entry, boosted by continued material increases in broadband availability/speeds globally and the fact that on most of earth net neutrality regulations allow Netflix to piggy back for nearly free on the substantial investment to increase broadband speeds made by telecom companies.”
Bernstein analyst Todd Juenger repeated his Outperform rating, while lifting his target to $671, from $591. In his note, Juenger compared Netflix to Disney, noting that even as Disney suspended its dividend, Netflix is contemplating buybacks. He noted that Disney+ has less than half the subscribers that Netflix does, at about half the average revenue per user. He also thinks Disney has narrower consumer appeal, and pointed out that Disney is facing up to five years of negative free cash flow while Netflix is turning cash flow positive.
Juenger said Netflix’s results confirmed many elements of his bullish thesis on the stock. The company added 37 million subscribers in 2020, and he thinks they will prove to have high lifetime value. He said the rate of churn was lower both sequentially and year over year, and that engagement per member—the amount of time spent watching Netflix content—was up by double digits in all regions. The company was able to raise prices; it is boosting investment in content; average revenue per user is rising in the Asia-Pacific region; free cash flow is positive; and the company is retiring debt, planning stock buybacks and growing subscribers in its home market, he noted.
UBS analyst Eric Sheridan increased his rating on the stock to Buy from Neutral, while lifting his target price to $650, from $540. He thinks the big takeaways from the announcement were that Netflix showed strong global subscribership growth even as competition intensifies, and following its robust growth in the first half of 2020. At the same time, he noted, the company continues to increase investment in content and has laid out a strong, multiyear story for its margins and free cash flow.
Sheridan views Netflix as “the category leader in streaming media,” saying its “core competencies in both content and tech should create a flywheel of higher subscriber growth and consumption driving leverage on content spend.”
Write to Eric J. Savitz at [email protected]
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