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Netflix Is Considering a Stock-Buyback Program

By Daniel Sparks - Jan 19, 2021 at 4:42PM

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Once a cash-burning machine, the streaming-TV giant is transforming into a cash cow.

Netflix (NFLX 5.03%) shares surged in after-hours trading on Tuesday following the company's strong fourth-quarter update. Not only did Netflix report better-than-expected revenue and subscribers, but it also said it's on pace to become sustainably cash flow positive in the near future. Indeed, management is so confident in this outcome that it's already considering putting some excess cash flow to use in a share-repurchase program.

Here's a look at the key takeaways from the streaming-giant's fourth-quarter results.

A red couch in a living room in front of a large TV screen.

Image source: Getty Images.

Netflix Q4 earnings: The raw numbers

Metric

Q4 2020

Q4 2019

Change

Revenue

$6.64 billion

$5.47 billion

21.5%

Earnings per share

$1.19

$1.30

(8%)

Subscribers

203.7

167.0 million

21.9%

Source: Netflix fourth-quarter shareholder letter. Table by author.

Netflix's fourth-quarter revenue rose 22% year over year to $6.64 billion, surpassing analysts' average estimate for revenue of $6.63 billion. Earnings per share of $1.19 was below analysts' view for $1.30, but the company's reported earnings-per-share figure notably included a $258 million non-cash charge from currency remeasurement on the company's euro-denominated debt. Quarterly net income would have been nearly 50% higher without this non-cash unrealized loss.

The quarter was fueled by a 22% year-over-year increase in subscribers. Netflix added 8.51 paid members during the quarter, well ahead of management's guidance for 6 million net additions. 

Highlighting Netflix's incredible momentum for the full year of 2020, the company managed to add a record 37 million new members during the year.

Big cash flow is on the horizon

While Netflix's financial results and subscriber performance were notable, the star of the quarter was management's commentary on cash flow: "We believe we are very close to being sustainably [free cash flow] positive. For the full year 2021, we currently anticipate free cash flow will be around break even (vs. our prior expectation for -$1 billion to break even)."

Free cash flow, which is equal to cash generated from operations less capital expenditures, is the cash that a business generates after all operating and investment activity is accounted for. It represents the cash that can be used to pay off debt, repurchase shares, make acquisitions, or even pay dividends.

Netflix has long been known for burning through its cash as it spends heavily on content creation. Big spending on content has led the company to repeatedly turn to debt markets to raise capital. But Netflix's higher sales and greater economies of scale today mean that those days may be over soon. Management explained:

Combined with our $8.2 billion cash balance and our $750m undrawn credit facility, we believe we no longer have a need to raise external financing for our day-to-day operations. Our 5.375% February 1, 2021 bonds mature in Q1. We plan on repaying the bond at maturity out of cash on hand, as we are currently well above our minimum cash needs.

Even more, the company said it will be exploring the idea of using some of its excess cash to repurchase shares.

Shares of the growth stock soared as much as 13% in after-hours trading on Tuesday as investors applauded Netflix's improving financial position.

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