Please ensure Javascript is enabled for purposes of website accessibility

3 Must-See Quotes From Netflix's Q4 Shareholder Letter

By Daniel Sparks - Jan 25, 2020 at 4:45PM

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

Here are three reasons the streaming-TV specialist's business is poised for more strong growth.

For the most part, the market seems pleased with Netflix's (NFLX 2.17%) fourth-quarter update. Shares are up more than 4% since the company released its quarterly results earlier this week. The main highlight from the quarter was the streaming-TV giant's better-than-expected global subscriber growth.

As investors look over the results and consider the implications of the quarter's performance, here are some key takeaways from the quarter's earnings call.

A group of young people watching TV together.

Image source: Getty Images.

This may be the worst of Netflix's FCF trends

One of the main criticisms investors have of Netflix is the big spending required to continue producing high-quality content that attracts and retains members. While investing in original content gives Netflix the benefit of owning its content in perpetuity, these investments have weighed on the company's free cash flow (FCF, defined as operating cash flow less capital expenditures). This was particularly the case in 2019. Free cash flow was negative-$3.3 billion -- worse than in any other year.

Fortunately, however, management said in its fourth-quarter shareholder letter that its free cash flow trends should only improve from here.

"Our plan is to continually improve FCF each year and to move slowly toward FCF positive," the company said.

For 2020, management said it expects free cash flow to improve to negative $2.5 billion.

Until it's free cash flow positive, Netflix will continue to finance its investment needs with low-interest senior notes. But as the company's free cash flow profile improves, Netflix will be less reliant on debt markets and will be able to fund more of its investment plans with cash from operations.

These are still early days for streaming

While management acknowledged that competition may have been one factor (along with the company's recent price increase in the U.S.) that played a role in elevated member churn domestically, management is still unfazed about an intensifying competitive environment. The company's resolve is partly due to Netflix's tenured experience in streaming but it's also a factor of the overall market opportunity.

"Many media companies and tech giants are launching streaming services, reinforcing the major trend of the transition from linear to streaming entertainment," management explained. "This is happening all over the world and is still in its early stages, leaving ample room for many services to grow as linear TV wanes."

Netflix is seeing impressive momentum internationally

Finally, investors should note that while subscriber growth is more modest in the U.S. and Canada -- with 550,000 net member additions during Q4 -- it is very strong outside of these markets.

"We generated Q4-record paid net adds in each of the EMEA, LATAM and APAC regions," Netflix said, referring to Europe, Middle East, and Africa; Latin America; and Asia-Pacific.

Overall, these quotes highlight some reasons for investors to remain optimistic about Netflix's long-term prospects, even as new streaming services come to market.

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.
$190.56 (2.17%) $4.05

*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 service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/18/2022.

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.