With a business that's firing on all cylinders and a stock that has risen 53% in the past year, Netflix (NASDAQ:NFLX) is on the mind of many investors these days. The company benefited from coronavirus-induced lockdowns as people were forced to stay in their homes and find ways to entertain themselves.
Although this FAANG stock recently reported fourth-quarter 2020 financial results that beat Wall Street estimates for revenue and subscriber additions, what caught my attention was management's comments regarding Netflix's impending financial position. As if the business hasn't already done enough to please investors, it could be ready to make shareholders even happier in the years ahead.
Here are three important developments potential investors need to know before purchasing the stock.
Positive free cash flow
In the five-year period from 2015 through 2019, Netflix's total free cash flow was negative $10.9 billion. Instead of producing cash, which is what companies are supposed to do, Netflix was a perennial cash burner. But this habit may be coming to an end for good.
For full-year 2021, Netflix management expects the company to break even in terms of free cash flow. And they think this will be a real turning point. Last year, Netflix generated substantial free cash flow of $1.9 billion thanks to COVID-related delays to many of its original productions. Outside of those once in a century circumstances, the company is on track to begin sustainably generating excess cash starting in 2022.
And if it took the streaming giant reaching 204 million paid subscribers to stop draining cash, think of how much money competitors are destined to lose before they reach Netflix's scale.
No need for external financing
With positive free cash flow on the horizon, management believes the days of Netflix depending on the capital markets are over. "We no longer have a need to raise external financing for our day-to-day operations," management mentioned in the fourth quarter shareholder letter. Netflix has 16 different debt obligations currently outstanding with a total principal amount of $16.4 billion, so it's great news for investors that the plan is for this number to stop increasing.
One of the biggest knocks on Netflix is the belief that it will always need to borrow money to fund its operations. If we believe management's recent comments, that's no longer the case.
Defenders of Netflix stock have been waiting for this moment. First, it was a matter of if the company will stop raising debt. Then, it was a matter of when. And now, we finally know that Netflix is on its way to being financially self-sufficient.
Returning cash to shareholders
What does a company that generates positive free cash flow and no longer needs to issue debt do next? CFO Spencer Neumann has the answer: "If we have excess cash, we'll return it to shareholders through a share buyback program," he said on the most recent earnings call. While I have more confidence in the previous two points occurring, I am more skeptical about this, because it seems to be many years away.
Even though Netflix may start producing cash, it doesn't mean the company should already commit to returning it to shareholders. Instead, building a sizable war chest like its FAANG peers is the right move to me. The streaming space is still growing and competition will remain fierce, so having the flexibility to invest heavily when opportunities arise will be a key advantage.
Those looking to buy Netflix stock now have more to cheer about. The business is performing extremely well, and management's positive comments about the company's future financial position should only ease concerns for potential investors.