Investors had high expectations heading into Netflix's (NFLX 1.56%) fourth-quarter earnings report this week. Even though CEO Reed Hastings and his team had warned about slowing growth three months ago, the Q4 period usually brings spiking engagement as people watch more TV and upgrade their streaming equipment over the holidays.
Yet Netflix blew past those elevated Wall Street targets and set a new annual growth record along the way for 2020. The news was even better on the financial front, which seems set to include gushing cash flow into the foreseeable future.
Let's take a closer look.
Not nearly done growing
Netflix ran past management's prior forecast that called for subscriber additions to land at 6 million. Its actual gains -- 8.5 million -- nearly matched the blockbuster 8.8 million boost that the company achieved a year ago.
That was a welcome sight for investors worried that Netflix might be close to done expanding its global business. Walt Disney built a huge platform of subscribers for its Disney+ streaming service in its first year, after all, which might have pressured the streaming leader in 2020.
Instead, Netflix added 37 million paying members in 2020 compared to its prior record of 29 million set in 2018. Those users stayed highly engaged, with a flood of exclusive content drawing massive viewership. The Midnight Sky, a movie Netflix released in the period, attracted 72 million watchers in its first month on the service. Management also said the series Bridgerton was "immensely popular" while promising more detailed viewership statistics on the way.
Profits and cash
Netflix tried to keep up with the surging profits powered by all that growth, but management couldn't reinvest cash into the business quite fast enough. As a result, operating margin jumped by more than management's long-term goal of about 3% per year, rising from 13% to 18% in 2020.
Cash flow was also strong, with outflows landing at just $138 million for the quarter, translating into a positive $1.9 billion for the year. That result matches with management's forecast from late October, but Netflix's new outlook makes it clear that the business is on an improving financial trajectory.
Positive cash flow from here
Executives now believe they'll hit break-even cash flow in 2021 to mark the company's first year free from needing loans since it started its original content push. Cash flow should improve from there with help from that steadily expanding profitability and growing user base.
Netflix's short-term forecast envisions a sharp subscriber slowdown as it goes up against the start of COVID-19 lockdowns from early 2019. Management said the company should still push its global user base to roughly 210 million by late March.
Executives implied significant direct cash returns from stock buybacks likely starting later in the year. But the bigger reasons for shareholder celebrations include the fact that Netflix has clearly established itself as the leader in a competitive industry that's likely to grow for many more years.
Management had to allocate cash aggressively since 2012 to protect and extend that valuable market position. But the huge returns from those successes will start showing up in 2021 and beyond.