It wasn't long ago when Netflix's (NASDAQ:NFLX) negative cash flow was a hot topic among investors following the company. But the streaming-TV giant showed a starkly different financial profile in 2020, swinging from burning through billions of dollars annually in 2019 to generating billions of dollars, or positive free cash flow.

While this free cash flow level isn't sustainable in the near-term (more on this below), it hints at what's to come. In fact, it wouldn't be surprising to one day see Netflix generate more than $10 billion annually in free cash flow.

Here's a closer look at the free cash flow teaser you don't want to miss.

A bar chart with an arrow highlighting a growth trend.

Image source: Netflix.

A window into Netflix's future

In the third quarter of 2019, Netflix reported negative free cash flow of $502 million. This means the company's cash flow from operations less capital expenditures took a bite out of Netflix's cash position. This was a fairly low rate of cash burn for Netflix compared to other quarters. In the third quarter of 2018, for instance, free cash flow was negative $859 million; for the full year of 2019, free cash flow was negative $3.3 billion. 

Fast forward to 2020: Q3 2020 free cash flow was positive $1.1 billion. Year-to-date reported free cash flow is $2.2 billion. This compares to negative $1.6 billion for the year-ago trailing-9-month period. 

It gets worse before it gets better

But here's the catch. Netflix's free cash flow in 2020 has benefited from a sharp slowdown in spending on original productions. As production ramps up in Q4, management expects to return to negative free cash flow, bringing full-year free cash flow to $2 billion. Looking to 2021, management expects free cash flow to be between negative $1 billion and breakeven.

In Netflix's second-quarter 2020 shareholder letter, management pointed out that the company's recent financial profile presents an "early snapshot" of how the company could generate free cash flow once revenue has grown to the point that content spending is a much smaller portion of total sales.

"This resulted in a FCF margin of +15% in Q2," management said in its second-quarter earnings call. "Of course, our plan is to continue to grow our content spend (as we don't believe we are anywhere near maturity), but the [quarter's free cash flow profile] may prove illustrative."

This may be just the tip of the iceberg

So, what could Netflix's free cash flow look like at maturity?

While it may take more than five years for Netflix's content spending to stop growing rapidly, investors can apply a free cash flow margin of 15% to a reasonable estimate of the company's revenue five years from now to get an idea of where things are headed.

Assuming Netflix's annualized revenue growth rate slows from an average rate of 32% over the past three years to a rate of 15% over the upcoming five years, the streaming-TV giant's free cash flow margin of 15% on $48 billion of annual revenue (up from about $24 today) would translate to annual free cash flow of more than $7 billion in 2025. While investors should take this back-of-the-napkin math with a grain of salt, it suggests annual free cash flow could rise to more than $10 billion within the next 10 years.

This exercise makes Netflix's $213 billion market capitalization today look a bit more reasonable.

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