End of Netflix's cash bonfires in sight as it nears turning profitable

Netflix stunned investors Tuesday by announcing that it's "very close" to becoming a true cash-flow-generating company and that it no longer needs to borrow to finance its day-to-day operations

Netflix Inc would like to thank you for attending its cash bonfires over the years but says it’s time to go home now — and watch more Netflix. The streaming-video company stunned investors Tuesday by announcing that it’s “very close” to becoming a true cash-flow-generating company and that it no longer needs to borrow to finance its day-to-day operations. 

This revelation, which came in the release of fourth-quarter results, is significant because it would seem to firmly rebut the biggest longstanding argument against owning Netflix shares — that the business can’t sustain itself. After all, this is the same company that burned so much cash in 2019 — more than $3 billion — that its logo should’ve been a flame. At the time, Walt Disney Co’s film studios were earning that much, while its theme parks and other vacation-oriented business lines were pulling in more than $6 billion in operating income.

But Netflix’s strategy — spending heaps of borrowed money to produce future programming — left it remarkably and uniquely prepared for the Covid-19 crisis. While Hollywood productions had to shut down and other media companies grappled with the resulting content shortages, the backlog Netflix had built up allowed it to release hit after hit throughout lockdowns. It’s also planning to release a new movie every week in 2021.

Meanwhile, Disney and others have substantially shifted their focus to streaming as the pandemic bludgeoned their top businesses, leaving movie theatres, theme parks and cruise ships desolate.

Despite all the new competition and Netflix’s recent price hike, the service managed to add 8.5 million subscribers in the fourth quarter, a couple million more than analysts were expecting. Those new users are predominantly outside the US. The stock surged 14 per cent in after-hours trading, giving Netflix a market value of nearly $250 billion. Investors were likely just as giddy about the prospect of the company buying back stock in the future, as its report signalled.

Even though consumers are bouncing around trying out different services, many are re-subscribing when there’s new material to watch. Roughly 40 per cent of Netflix’s “new” members in the final three months of the year were customers who had paid for the service in the past, according to anonymised credit-card transaction and email receipt data tracked by Antenna; re-subscribers also accounted for 45 per cent of Disney+ sign-ups in October, when season two of The Mandalorian came out.