If publicly traded companies boil down to rewarding stock holders, it’s difficult to describe Netflix (NFLX) as anything other than a rousing success. The streaming giant’s stock price grew by 62% in 2020 and has grown at an average annualized rate of 37.5% overall. Tuesday’s Q4 earnings report capped off an incredible year in which the streamer added a record 37 million new subscribers, or nearly the size of Hulu’s entire customer base (38.8 million). It also reported $25 billion in annual revenue on the year.
If they ever reboot Back to the Future, Marty McFly will go back in time to buy Netflix stock instead of trying to take advantage of the sports almanac.
Looking ahead, Netflix projects Q1 2021 to add 6 million new subscribers after tallying 8.5 million in Q4 2020. The company also announced that it will no longer need to raise external capital (i.e. borrow huge sums of outside money) to fund its growth, which is good news for the $15 billion in debt hanging around Netflix’s neck.
“Most importantly, the company’s guidance for Q1 is strong, suggesting that subscribers continue to recognize that content is king amid the pandemic,” Haris Anwar, senior analyst at Investing.com, told Observer. “Furthermore, with plans to be cash flow positive in 2022, Netflix investors will have plenty to be positive about.”
Shares rose 10% in after hours trading based on the company’s overall subscriber growth—becoming the first TV streaming service to surpass 200 million global paying customers will do that. Yet long-term investors have not yet been fully validated as the streamer must not prove it can consistently turn a profit without adding to its debt. If Netflix can sustain free cash flow positivity moving forward, it suddenly becomes a viable business model that brings in handsome returns on investment. But getting to that point amid $17 billion-plus in annual content expenditures is no small feat.
In simple terms, business is complicated.
“It is still hard to gauge the growth rate in program expenses from here,” Steven Birenberg, founder of Northlake Capital Management, told Observer. “Is there a point where they can drive global sub growth but dramatically slow the growth rate of content spend? There’s so much content now that you would think there is enough not renewed each year that they can just reinvest those savings into originals and there are still enough new shows and movies that subs grow and churn stays low.”
According to ANTENNA Data, Netflix boasts the lowest churn rate of any major SVOD platform. In other words, it has earned an unprecedented level of customer loyalty that results it amazing retention rates of new subs.
Netflix' Retention remains best-in-class: the service boasts the lowest Churn Rate and highest 12mo Survival of its Premium SVOD peers pic.twitter.com/fDQbxu47h9
— Antenna (@AntennaData) January 20, 2021
Netflix’s unprecedented success in 2020, largely driven by the coronavirus pandemic, accelerated the company’s timeline of moving out of the growth phase and into the profit phase. That’s why the company rolled out yet another price hike late last year earlier than expected. It’s also why trigger-happy Netflix felt comfortable executing a wave of cancellations last year. But can the streamer really afford to reduce content spend amid rising competition from Disney+ and HBO Max while still retaining the bulk of its customer base?
“The bear case is competition means they have to forever grow content spend just to keep current subs as penetration rises and competition continues to invest,” Birenberg said. “I think for the several years the trend toward streaming for entertainment is so strong that there is a rising tide that gives Netflix room to grow even as others enter streaming in a big way.”
Netflix stock has surged 15% over the last 24 hours.
