A few days before Netflix (NFLX -1.12%) reported third-quarter earnings, I decided to buy some shares. While the latest round of numbers looks strong, with global streaming paid memberships reaccelerating to 9.4% year over year, my decision had nothing to do with short-term performance. Rather, I was encouraged with where Netflix is clearly headed over the long term.
With a recent hit like Squid Game, Netflix is proving it can cross cultural boundaries and appeal universally to everyone. It seems that Netflix's quest to dominate the global streaming market is only just beginning.
Netflix spent $12.5 billion on content last year, but that was a light year for the streamer given the production delays during the pandemic. Nonetheless, its recent expenditure is about to pay off big. Netflix expects 67 million households to watch the limited series Maid, which launched on Oct. 1 and follows comparable engagement numbers for season five of La Casa de Papel (Money Heist) and season three of Sex Education.
One highlight from the third-quarter earnings report that has me excited about Netflix's future is how the company's international expansion efforts continue to drive engagement back home for viewers in the U.S. The success of the Spanish crime drama Money Heist is a good example, but Netflix just scored an even bigger hit with the Korean series Squid Game.
Squid Game released in September and has become Netflix's biggest hit ever, with a staggering 142 million households watching in the first four weeks. The show has been ranked No. 1 across 94 countries, including the U.S., and management sees high demand for related consumer products stemming from its surging popularity.
Whatever dollar figure Netflix spent to make Squid Game is going to come back many times over when considering the free marketing it gets across social media and spin-off skits on Saturday Night Live. It's natural for people to want to seek out and watch the shows that all their friends are talking about, and that's a key factor that fuels subscriber growth. Netflix has been doing this for years with shows like House of Cards, The Crown, The Queen's Gambit, and Stranger Things, and the valuable data it has on viewers' preferences should inform many more in the future.
Turning a profitable corner
Netflix has a strong content slate for the fourth quarter, with several popular series returning, including The Witcher, Cobra Kai, and the final chapter of Money Heist. This strong slate means free cash flow will be negative in Q4, but management still expects free cash flow to turn positive in 2022 and beyond.
The improvement in finances means that Netflix will now have more wiggle room to make acquisitions, such as the recently announced deal to buy the Roald Dahl Story Company. Netflix also plans to return excess cash going forward to shareholders in the form of share repurchases, where it just bought $100 million worth of shares in the third quarter.
Netflix is turning a corner, stocking its content library while positioning the business on a solid financial footing. The stock price has recently surged toward new highs after being stuck in a trading range over the past year. With Netflix's ability to keep turning out surprise hits that create a stir on social media, on top of its improving cash-generating ability, I decided to buy shares now because I only see this streaming stock reaching higher highs over the next 10 years and beyond.