ResearchNetflix's New Narrative

Netflix's New Narrative

Jan 20, 2021

On Wednesday, Netflix surged +17% after reporting that it had added 8.5 million subscribers in Q4 - that's more than 31% above analyst expectations and enough to help the company breach the 200 million paid subscriber mark.

To put that in context, that means in 2020, Netflix grew its subscriber base by roughly 37 million subscribers - or roughly the same size of Hulu's entire subscriber base as of December.

While we were very impressed with this landmark, we believe the significant subscriber outperformance likely represented a partial "pull-forward" of next quarter's growth, and were more focused on the changing story around Netflix's capital structure outlook.

In particular, we were pleased to see the company announce that was very close to hitting free cash flow profitability and no longer expected to need external financing to run its day-to-day operations.

As a result of this changing dynamic, the company pulled forward its cash flow breakeven estimates to as early as this fiscal 2021.

We believe this moment will mark a dramatic shift in the way investors perceive Netflix, with the focus likely shifting very rapidly from questions around content spend sustainability, to debates around whether acquisitions or internal investments represent the company's best use of capital.

This type of shift should meaningfully support Netflix's valuation, and more importantly, it means Netflix can finally begin directing all of its attention on its business and investing in what it knows best.

In its shareholder letter, Netflix remarked that it might even consider stock buybacks going forward.

While we believe this is a powerful way to telegraph its financial capabilities and the extent to which it believes its stock is undervalued, we would prefer to see Netflix invest more in internal growth initiatives, such as its content strategy (both within and beyond film/television).

With over 200 million subscribers that are still primarily served via just one vector of the attention economy, we see plenty of opportunities for Netflix to expand its reach - not just into more traditional media, but also into new media formats and consumption environments that will increasingly shape the future.

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