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What Will Netflix Do With Piles of Cash?

By Adam Levy - Jan 27, 2021 at 12:30PM

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Netflix could have more cash flow than it knows what to do with in just a few years.

Netflix (NFLX 1.56%) made a very important announcement in its fourth quarter letter to shareholders. "We believe we no longer have a need to raise external financing for our day-to-day operations," management wrote in bolded and italicized type.

CFO Spence Neumann expects the company to produce breakeven free cash flow for the year, and that number ought to climb well into positive territory in 2022 and beyond. The company will pay down existing debt to a manageable level and then plans to return excess cash to shareholders through a share buyback.

But Netflix could reasonably generate over $10 billion in free cash flow every year by the middle of the decade. What will it do with its piles of cash at that point?

Office building with Netflix logo over the door.

Netflix offices in LA. Image source: Netflix.

Expand the service with new verticals

Netflix has subtly expanded its service over the last few years to appeal to a broader audience. Investments in film, unscripted, adult animation, and more have already produced strong engagement, expanding its audience and enabling continued price increases.

The media company's also pouring more money into children's programming and animated films. The move could be a response to Disney's (DIS -0.70%) rapid ascension in streaming. If anything, Disney+ is proving the breadth of demand for franchise animated films like its Pixar and Disney studio productions. 

Netflix may use its excess cash to invest in additional verticals that are showing strong engagement on other platforms. Several analysts have speculated Netflix could acquire sports rights at some point in the future. Content chief Ted Sarandos has previously said sports isn't core to Netflix's value proposition; there's nothing Netflix can add to the sports viewing experience.

But in an interview with Variety in September, CEO Reed Hastings said sports and other content verticals could make their way onto Netflix in the distant future. "I doubt news, but sports, video gaming, user-generated content -- if you think of the other big categories, someday it could make sense," he said.

There's certainly potential for Netflix to add new verticals, but live programming like sports is well outside its wheelhouse. As with every new area Netflix invests in, it has the potential to start small and grow quickly if it sees traction. And with a growing cash buffer, experimenting in other areas comes with a favorable risk-reward ratio.

Acquiring content and intellectual property

Netflix may become more interested in acquisitions in the future if it has excess cash to spend. It's made only one acquisition in the past; it bought comic publisher Millarworld in 2017. The first slate of original series and films based on Millarworld characters will debut this year.

If Netflix can create popular content based on acquired intellectual property, it may look to repeat the process in the future. It's a strategy right out of Bob Iger's Disney playbook. Disney made several major acquisitions during Iger's tenure, and he reinvigorated franchises and built out a slate of potential blockbusters well into the next decade based on acquired intellectual property.

Netflix may focus more on regional acquisitions that could further its progress in attracting international audiences. Netflix has the benefit of being able to produce content for local markets with the potential of creating a global hit. Disney, by comparison, is trying to make a billion-dollar box-office hit with every film release. Ultimately, more local acquisitions could present more opportunities and be a better investment for Netflix.

A long-term play

There's still a long way to go before Netflix is sitting on piles of cash. After all, it's only expecting to break even this year. But with consistent revenue growth and operating margin expansion set to continue for years to come, it may be only a few years before the media company has more cash than it can spend with its current strategic plans. While returning cash to shareholders through a buyback is nice, many investors may be just as happy to see Netflix continue investing to further its long-term growth.

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