The day after Netflix reported that its second-quarter subscriber decline was far less than investor concerns, another conclusion could come from the world’s largest streaming service revenue report: Netflix too much. A long-standing debate about whether. The content seems to be over.
Importantly, he was launching a new series in the franchise as Netflix recorded positive operating cash flow in the quarter, despite spending $ 1.3 billion more on content than in the first three months of the year. about it. “Stranger Things”. He completed his $ 200 million action thriller, The Gray Man. Netflix announced that it had generated $ 1 billion in cash flow earlier this year. According to analysts, this number could double or triple by 2023.
“Netflix revenues will increase by 10% to 15% next year, but content spending will be zero,” said Robert Kantwell, director of Compound Kings exchange-traded funds in Nashville. In July. 19. “Next year’s free cash flow will be between $ 300 and $ 3.5 billion.”
Critics have long focused on the fact that Netflix’s spending on new movies and TV shows exceeds reported revenues due to accounting rules that allow spending on content over multiple years. rice field. .. But it ended in the first quarter of this year and stayed in the second quarter at an additional cost.
In its quarterly earnings presentation, Netflix said it would maintain content spending levels at around $ 17 billion annually for the next two years. Two executives said spending would remain “within the zip code.” This will exceed $ 11.8 billion in 2020, little change from last year’s $ 17.7 billion.
The company spent most of its revenue calls discussing plans to add a hierarchy to support advertising to its service offerings. This makes Netflix available to households who don’t want to pay $ 10-20 per month for their subscription. Many of these households bypass Netflix rules and use passwords for friends and family.
According to Mark Mahaney, an analyst at Cantwell and Evercore ISI, the combination of leveling content spending and increasing advertising revenue is driving cash flow growth.
According to Mahney, the company’s Netflix is expected to reach $ 2.5 billion in cash by 2023 and could reach $ 4 billion by 2024.
“If it generates $ 4 billion in cash flow, it’s [more than] 4% return. ” “It’s solid. By 2023, it will trade at 45x free cash flow. It’s not that interesting.”
No analyst doubts that Netflix’s advertising strategy will work. Competitors like Hulu currently earn 15% to 20% of advertising revenue, according to Cantwell, and Mahaney said Netflix should have made that decision a few years ago.
At Netflix, for a company with a market capitalization of about $ 91 billion today, 20% of its sales are worth $ 6 billion annually. According to Kantwell, the revenue will generate more than 40% of the gross profit that the company’s content business is currently generating, with less capital investment.
Next year’s cash flow will be between $ 250 million and $ 300 million, as the advertising business will take time to grow, Kantwell said.
The problem is that additional cash flow does not change the fact that Netflix has become one of the fastest growing stocks of the century: the 2002 IPO price adjusted for the stock split was 1.07 per share. Equal to the dollar, it has fallen slightly later in the year, as 65 cents, has become a play for investors looking for higher returns and worthy of paying lower price-earnings ratios to acquire them.
At its peak, Netflix optimists said the company attracted up to 800 million subscribers worldwide, Kantwell said. He said the ship probably sailed, because many international markets turned out to be more difficult to invade than some allegations. Netflix already has 73 million subscribers in the United States and Canada, bringing together more than half of the homes in both countries.
Cash flow isn’t big enough to actually drive value investors until after 2024, Mahany said.
“It’s a transition,” he said. “Growth will be much slower and cash flow will be much more attractive.”
But growth has been a Netflix calling card for years and a reliable magnet to attract content creators, customers and investors. As growth slows, the pace of new content additions stabilizes, and technology loses its competitive advantage over rivals, new spending discipline must be relaxed to stay ahead of rivals such as HBO Max and Warner Bros. There is a risk that you have to. Discovery Brothers Disney Plus, Kantwell said.
“The challenge is to assume that Netflix can create content that has the value of a long-term library. This is one of the most difficult bets on Netflix at the moment,” he said. “You must make better content than they have.”