The bear thesis for investing in Netflix (NASDAQ:NFLX) stock is that the company won't be able to generate meaningful cash flow, forced to pile on debt until it collapses under the strain. Recent events, however, have turned that argument on its head. What does this mean for Netflix investors?

Asit Sharma: It is 4:39. It is time to hand the reins over to Mr. Danny Vena. I built this up. We built up Tesla. Now it's your turn, sir, to tell us what we want to know about Netflix, which was having a down day when I checked it mid-afternoon.

Danny Vena: I looked at Netflix toward the close of the market. It was down nearly 7%. Let me just say that having been a Netflix shareholder for a long time, in fact, Netflix was the very first position that I bought as a Fool was Netflix. Having ridden it down, like Tim Beyers was talking about in the last segment, ridden it down for more than 75% during the Qwikster fiasco and the subsequent price increase, where I remember the headlines, "Netflix raises prices 60%." That wasn't exactly true, but that's what the headlines said.

I would say that I take this quarter as being par for the course with Netflix. Now, I'm going to share a screen here. We did kind of a top-level view yesterday, and so I'll just quickly hit those numbers. But here's Netflix's shareholder letter. Revenue, here on the right-hand side, was just over $6.4 billion, or up about 23% year over year. Net income was $790 million, up from $665 million in the prior-year quarter. So pretty good jump in numbers.

But the two things that I want to focus on here for today, for these purposes, is to look at, first of all, the company's free cash flow, and then second of all, look at kind of what they're doing in the rest of the world. Because a lot of the growth thesis used to be in expanding their market share in the United States. I think nowadays it's expanding their market share in the rest of the world.

Down here in their shareholder letter, free cash flow for this quarter was $1.1 billion, which is their highest free cash flow on record that I can recall. I'm pretty sure it's, period. If you look back, this is the third consecutive quarter. First quarter, $162 million; second quarter, $899 million; this quarter, $1.145 billion in free cash flow. Now, I think that's important because this really adds credibility to one of the long-term Netflix investing thesis, which is once the company takes its foot off the gas pedal for creating new content, then they are going to be able to increase their free cash flow, they're going to drop more profits to the bottom line, and the company is going to be a cash machine thereafter. The bears say, well, they are going to need to be able to do that and there's no evidence that they can. I think the last three quarters is the evidence that shows that that's exactly what's going to happen.

Because of COVID, their content production in the second quarter and then again in the third quarter slowed down from what they originally anticipated, and sure enough, free cash flow shot through the roof in those two quarters. Profitability was also up. Maybe not to such a degree, but again, I think this confirms the thesis. Like I said, it takes their foot off the gas on content creation, they're going to have a cash machine.

Now, the other page that I wanted to focus on here is the regional breakdown. Shareholders will remember that last year Netflix went from reporting U.S. subscriber growth, and worldwide subscriber growth to breaking it down by four regions. Those four regions are the U.S. and Canada, or UCAN; EMEA, which is Europe, the Middle East, and Africa; LATAM, which is Latin America; and down here at the bottom, APAC, or Asia-Pacific. And if you look at these numbers, I think it's really telling about Netflix, and where it goes from here.

In the third quarter, paid memberships in the U.S. and Canada were 73 million, up from 67 million this time last year. So maybe up about 6 million, not really a barn-burner. If you look at Europe and the Middle East, up to 62 million, up from 47 million. That's a pretty sizable jump there. Latin America, 36 million, compared to 29 million. Again, another sizable jump. Asia-Pacific, 23 million up from 14 million. So you can see that Netflix is growing at a much, much higher rate in the other regions of the world than it is in the United States and Canada, and to me, that adds credibility to the investing thesis that Netflix growth from here on out really is about how it does in the rest of the world. Which is why the company is going into these international markets, they're creating local language content in these countries, and drawing in more international audiences.

One of the things that they found, and I'll use one series as an example, La Casa de Papel, which in the English translates to Money Heist, was one that they created for the market in Spain. What they found was, is, this Spanish-language original was popular all over the world wherever there was a Spanish-speaking audience, and not only that, but they also found that where folks just decided that they would watch something in a different language, they were turning on this program. It had a good audience in the United States as well. So I would say that the big thing for me in this Netflix quarter was that, it in the last couple of quarters has confirmed for me two of the central points of my investing thesis, which is Netflix still has a whole lot of world out there to conquer, and once it slows down on content creation, the company is going to be a cash machine.

Sharma: Really appreciate you sharing some key metrics there, Danny, that people who are the more recently invested in Netflix, and they are watching it go down, or we're just longer-term shareholders who want to see what's the rationale for continuing to hold. I think you've made a really good case for that. Daniel, do you have any comments that you want to make on Netflix before we take a couple of questions on it?

Daniel Sparks: I just liked, Danny, how you highlighted that. We're seeing a preview of how things could look when content spending as a percentage of total sales comes down. I think that this is a preview of the free cash flow that investors have been waiting on. I think it's there, and it's one of the most sustainable, durable business models I've ever seen.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.