Please ensure Javascript is enabled for purposes of website accessibility

Thinking of Buying Netflix Stock? Here's What You Need to Know

By Neil Patel - Feb 11, 2021 at 8:08AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There are some new developments to consider before adding the streaming giant to your portfolio.

With a business that's firing on all cylinders and a stock that has risen 53% in the past year, Netflix (NFLX -0.69%) 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.

Left hand holding remote while person is watching streaming service

Image source: Getty Images.

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. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$178.36 (-0.69%) $-1.24

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
319%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.