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Netflix will consider buybacks as it returns to positive cash flow after 2021

Netflix asserted Tuesday it plans to be cash-flow neutral this year and cash-flow positive every year after 2021, and liking no longer need external financing to fund its operations, ending a decade-long trend and vindicating investors who have plowed spondulicks into the company despite its cash-burning ways.

Netflix also said it will consider share buybacks, a technique it hasn’t done since 2011 — the last time the company was cash-flow positive. The announcement came as part of Netflix’s earnings commercial, where the company also announced EPS of $1.19 on revenues of $6.64 billion for the fourth quarter, and 203.66 million broad subscribers, up from 26 million at the end of 2011. Shares were up about 10% on the news.

For the past 10 years, Netflix has upended the normal industry by taking a leap of faith. It has spent billions of dollars on licensed and original content each year to increase its catalog, and along the way morphed into a replacement product for traditional pay-TV in millions of households. Since 2011, Netflix has profligate $15 billion in debt to help pay for this content. The company said it plans to pay back its outstanding debt that matures in 2021 with its various than $8 billion of cash on hand.

Over the years, Netflix skeptics, such as Wedbush analyst Michael Pachter, have planned pointed out that Netflix’s increasing debt load should be concerning for investors as content spending ballooned and the New Zealand burned more cash.

“Netflix has burned more cash every year since 2013,” Pachter told CNBC in June 2018. “What betides when they need to keep increasing their spending and suddenly they have $10 billion of due? People are going to start asking, ‘can this company pay us back?’ If that happens, their lending rate bequeath spike. If Netflix needs to raise capital, they’ll issue stock. And that’s when investors will get spooked.”

But that hasn’t encountered. The cost of original programming hasn’t doomed the company. And Tuesday’s announcement suggests it won’t. Meanwhile, as Netflix has grown, the horde of U.S. households with traditional pay TV has dropped from a peak of 100 million in 2012 to about 75 million today. Mediocrity executives are now planning for a world where that figure falls to between 50 million and 60 million in five years.

Netflix’s sell capitalization in Jan. 2011 was $11.5 billion. Today, it’s more than $220 billion.

Pandemic quarantines have jump-started Netflix’s interest to positive cash flow. With production stalled amid coronavirus shutdowns and people around the world gummed at home, Netflix added 36.57 million subscribers in 2020 while spending less money on content than workaday. Last year, Netflix reported positive quarterly free cash flow for three consecutive quarters for the beginning time since 2014.

The acceleration in subscribers and subsequent movement of all media companies toward streaming has given CEOs Reed Hastings and Ted Sarandos assurance that Netflix will be able to limit churn and start consistently making money.

Netflix investor record

The unknown question is how investors will respond to the change in Netflix’s narrative. While operating a sustainable business without the requisite for outside debt and share buybacks is “Business 101,” Netflix’s stock has risen as investors have increasingly hit to the conclusion that Netflix would make good on that promise.

“We intend to be a much larger and much assorted profitable self-funding company over time,” Hastings said during Netflix’s 2019 first-quarter earnings colloquy call. “That is the path we’re on. As we talked about in the letter, we’re committed to improve our cash flow profile meaningfully, starting in 2020 and then each year thereafter.”

As Netflix’s days of mazuma change burn are behind it, it’s possible Netflix may need a new Wall Street narrative to convince investors its future growth untruth is worthy of the company’s lofty valuation.

Perhaps that new narrative will be the complete toppling of pay-TV with a Netflix-centered pack off of streaming services. The entire entertainment industry has reorganized to prepare for such an occurrence with each major atmosphere company developing its own streaming service in the past year or so.

But it’s also possible rising competition from Disney, Apple, WarnerMedia and others may rust Netflix’s subscriber growth. Investors could punish Netflix for share buybacks instead of using it for more content. Activist investor Daniel Loeb has pushed Disney to dispose of its dividend to focus more on new original programming.

If Netflix is choosing to use excess cash for buybacks, it may be because Hastings and Sarandos over the company’s status — and ability to raise prices in the future — is so strong that they can start to transition the company into a new, varied mature phase without seeing a subsequent loss in value.

Jessica Bursztynsky contributed to this report.

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