Netflix Inc. soared 14.2% in premarket trading on last Wednesday and closed the day with more than 16% spike in price after the announcement of their forth quarter earnings report. This would mark one of their best one-day post-earnings performance since 2016. While its profit missed expectations, here are three reasons why the video streaming giant spiked higher:
- Hitting its 200 million subscribers milestone
- Shifting from growth fuelled by debt to generating positive cash flow
- Netflix is still ahead of its major competitors
Hitting its 200 million subscribers milestone
In its forth quarter earnings report, Netflix made two key exciting announcements. Firstly, it has officially passed the 200 million mark in paid subscribers, out of which 18.5% or 37 million subscribers were added in 2020. Secondly, while investors are expecting its revenue growth is going to moderate as compared to previous years, Netflix announced that its annual revenue grew by 24% year-on-year, with $25 billion in 2020 revenue.
Shifting from growth fuelled by debt to generating positive cash flow
With a business model based on a subscription basis, subscribers and revenue growth are the two key metrics that investors have wanted for a long time. Netflix also anticipated that the 200 million paid subscribers will help to turn the video streaming giant into a free cash flow generating machine in 2021.
Netflix has been criticised that its subscriber growth was fuelled by its original content which it financed through debt. With new competitors entering the industry, from Amazon to Disney, Netflix’s need to continue its heavy investment in content which would boost its demand for debt in the future. However, Netflix said that it expects to generate positive cash flow from operations in 2022 and beyond and anticipated that 2021 could be cash flow break even. This would indicate an improvement over a prior expectation of negative $1 billion cash flow.
Another reason why Netflix is confident about its cash flow is that it can raise prices and keep adding subscribers. The monthly price hike by $1 to $13.99 in October 2020 suggested that price increases do not lead to mass cancelations.
Besides, the video streaming giant also has tons of unreleased original content which it anticipates will boost its subscriber. It has over 500 titles almost ready to launch and it announced earlier this month that it will release a new movie every week in 2021.
The management also mentioned that once the company starts generating consistent positive cash flow, they will start repaying the maturing bonds and explore ways to return cash to shareholders.
Netflix is still ahead of its major competitors
Among its competitors, the major rival is Disney+ which exceeded its expectations for 2020 by gaining more than 86 million subscribers. Disney is expecting to reach between 230 to 260 million subscribers by 2024. However, Ted Sarandos, Netflix co-CEO is confident that Netflix will win against Disney in family-oriented contents. He said that the competition from Disney gets Netflix to work harder in increasing the subscribers, putting more budget on content creation. They are even more dedicated to catch up Disney in family animation.