Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons to Believe Netflix’s Incredible Cash Flow Promise

By Demitri Kalogeropoulos - Oct 19, 2019 at 12:16PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The streaming TV giant sees this year as the low mark for annual cash outflows.

It won't be long before Netflix (NFLX -1.85%) starts generating positive cash flow. That's the prediction management stands by, despite the fact that cash trends are worsening to a $3.5 billion loss this year compared to $3 billion in 2018. Netflix plans to achieve this difficult turnaround even as annual subscriber growth slows for the first time in four years.

That cash flow forecast isn't as absurd as it might seem at first blush, though. Let's take a look at a few reasons it's a mistake to bet against CEO Reed Hastings and his team on this ambitious cash flow prediction.

NFLX Cash from Operations (TTM) Chart

NFLX Cash from Operations (TTM) data by YCharts.

1. Past promises kept

First, Netflix has a good track record for fulfilling its long-term financial targets. In early 2017, when the company started projecting what management called "steady" growth in operating margin, that figure had stood at 4% for the past two years.

Yet Hastings told investors to expect the rate to increase by 3 percentage points to 7% in the fiscal year ahead. Management hit that target a year later and projected another 3-percentage-point increase in 2018. Combined with the 35% revenue increase, hitting that goal allowed operating profits to almost double to $1.6 billion last year. Hastings and his team are projecting that margins will improve to 13% this year and to 16% in 2020, and the streak of wins here should give shareholders confidence in the company's other ambitious forecasts.

2. More ammunition on the way

Netflix's growth rate in the U.S. is being hurt by its latest fee increase, meaning there's a limit to the TV giant's pricing power given the amount of time users want to engage with its streaming service today. The downside of overshooting with those subscription costs is that membership gains are slowing, and that's why the growth stock sees annual global additions trending down in 2019.

A man watches TV.

Image source: Getty Images.

Yet there's a massive financial benefit to having its 60 million-plus U.S. members paying an average extra dollar each month. Revenue is growing faster than the subscriber base, up 27% over the last nine months. Netflix might not have room to raise prices again for at least another year, and Hastings said in a conference call that management plans to "give it a pause and focus on the value" of the service, especially through blockbuster movie releases. The good news is its last increase, plus the migration toward high-definition plans, will generate plenty of extra cash over the next few quarters anyway.

3. Competition won't derail subscriber growth

Netflix's latest prediction calls for membership gains to land at just under 27 million in 2019 compared to 29 million last year and 24 million in 2017. While that forecast assumes some bumpiness from the welcoming of Disney and Apple into the streaming market ("The launch of these new services will be noisy," executives said), it still translates into almost 8 million new signups, including 600,000 additions in the mature U.S. market.

Into 2020 and beyond, Netflix sees all the streaming services competing more with broadcast TV than with themselves. But even if you do believe the competition will hurt the industry leader, there won't be a disruptive exodus from the platform over the next year or so, especially as prices hold steady. Even sluggish subscriber growth should give Netflix the ammunition it needs to begin improving its cash outflow in 2020, with an eye toward slowly moving toward positive flow over the next few years.

Demitrios Kalogeropoulos owns shares of Apple, Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$241.15 (-1.85%) $-4.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
402%
 
S&P 500 Returns
129%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.