What happened

Shares of Netflix (NASDAQ:NFLX) were flying higher today after the company topped expectations in its fourth-quarter earnings report, and offered strong guidance for the year ahead. It also said it was done taking on debt, projecting break-even free cash flow for 2021, and putting to rest concerns about its cash burn, a favorite bugaboo of Netflix bears.

As a result, the stock was up 14.4% as of 11:19 a.m. EST today.

A receptionist at the Netflix office

Image source: Netflix.

So what

Netflix added 8.5 million subscribers in the fourth quarter, much better than its forecast in October of 6 million, thanks to a strong content slate and the pandemic still gripping much of the world.

Revenue jumped 21.5% to $6.64 billion, outpacing its guidance at $6.57 billion and analyst expectations at $6.63 billion. Operating margin came in at 14.4%, also ahead of guidance at 13.5% due to higher-than-expected revenue, and the company posted $1.19 in earnings per share, down from $1.30 a year ago, though that result includes an accounting loss on euro-dominated debt of $258 million. Adjusting for that, EPS would have been above $1.50. Analysts had expected EPS of $1.39.

What also delighted Netflix investors was that the company said it would no longer have to take on debt to fund operations. It also forecast break-even free cash flow for 2021, better than its prior expectation of negative $1 billion in FCF.

Now what

For the current quarter, Netflix expects to add 6 million new subscribers, and sees revenue growth accelerating to 23.6% as it benefits from recent price hikes in the U.S. and other regions. 

Netflix also lifted its operating-margin guidance for the year from 19% to 20%, a sign that its growth plan is delivering results faster than expected, and management said it continues to expect its operating margin to improve by an average of 3 percentage points each year.   

More than any prior quarter, this report makes clear the company's transition from a risky growth stock to a stable profit generator. It just wrapped up a year with 18% operating margin and it's done burning cash. That, along with another round of better-than-expected subscriber growth, is reason for investors to celebrate.

  

 

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.