Back in late 2018, I wrote a 15 page report on why Netflix stock was a great buy and was heading much higher. While most of what is in that report is still valid, I find the end of the report the most interesting to look back on. In the end of the report, I added a section called What to watch for in the next 24 months. Basically, watch these things over the next coming years to ensure the bull thesis remains in tact. Those items were 2019 (and beyond) operating margin, debt markets, future cash flow, subscriber growth and ARPU and competition. A few years later, let’s revisit these items and look at where Netflix, the company and the stock, is today.
In the 15 page report we previously wrote, I mentioned that Netflix was targeting a 13% operating margin for 2019, and that it was important to hit this as it moved toward more stable profitability. Not only did Netflix hit this number in 2019, but it exceeded the original 16% operating margin for 2020 (it hit 18% according to Netflix’s latest letter to shareholders). Moreover, Netflix is forecasting a 20% operating margin in 2021. Did Netflix pass the test we set out for it years ago? Yep.
Debt & Cash Flow
For years, the accumulation of debt as a result of negative cash flow was at the core of Netflix’s bear thesis. Amazingly in the last few quarters, Netflix has completely crushed this bear strong hold. Because of the huge 2020 year, Netflix said the following in the 2020 Q4 report:
We believe we are very close to being sustainably FCF positive. For the full year 2021, we currently anticipate free cash flow will be around break even (vs. our prior expectation for -$1 billion to break even). Combined with our $8.2 billion cash balance and our $750m undrawn credit facility, we believe we no longer have a need to raise external financing for our day-to-day operations. Our 5.375% February 1, 2021 bonds mature in Q1. We plan on repaying the bond at maturity out of cash on hand, as we are currently well above our minimum cash needs. As we generate excess cash, we intend to maintain $10B-15B in gross debt and will explore returning cash to shareholders through ongoing stock buybacks, as we did in the past (2007-2011).
Not only is Netflix not planning to issue new debt, it’s planning to pay it down and potentially move to stock buybacks in the future. Game changer for NFLX stock holders.
Subscriber Growth & ARPU
In our original report, we stated that it’ll be important to monitor ARPU as Netflix marches towards 200 million subscribers especially with much of it coming internationally where prices are lower. Incredibly, Netflix just added 37 million subscribers worldwide in 2020 while maintaining ARPU very steadily. A combination of higher prices in mature markets and further growth in new markets, Netflix has revenue growth mastered right now.
As Netflix has always stated, additional streaming services aren’t likely to hurt Netflix since it will simply accelerate cord cutting and people moving to a focus on streaming entertainment. With Disney+ and others in full swing, Netflix delivered its biggest year of subscriber growth yet, so it seems like we should take Netflix’s word on this.
Why I love NFLX stock
There are two main things I look for in a long-term stock:
- Is the company a leader in a secular growth area?
- Is the company relentlessly focused on the long-term potential even if it means lower profits short-term?
Netflix checks both of these boxes with flying colors. Undoubtedly, the world is migrating away from the previous cable television ecosystem toward on-demand streaming platforms. This has been underway for years and Netflix has led the charge.
Secondly, Netflix remains relentlessly focused on the flywheel effect of better content leading to more subscribers which leads to better content. For years, Netflix ignored the criticism that they were spending too much on content. Now all of the competition is attempting to catch up. In one sense, Netflix already won. They just have to keep the pedal down to become an even bigger global behemoth than it already is.
Netflix (NFLX) should easily cross the $600 in the near future and likely double in value in the years ahead and is continues to grow and dominate the profit share of the next era of global entertainment.