Interactive Investor

ii view: Netflix subscribers race past 200 million

21st January 2021 11:45

Keith Bowman from interactive investor

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Potential 2021 share buybacks and even a possible future move into sport leave this streamer favoured.

Fourth-quarter results to 31 December

  • Revenue up 21.5% from Q4 2019 to $6.64 billion
  • Global net paid additions up 8.5 million from the last quarter
  • Paid net subscriber adds up 21.9% from Q3 2019 to 203.6 million 
  • Earnings per share down 8% to $1.18

Guidance:

  • For Q1 2021, expects global paid net subscriber adds of 6 million vs 15.8 million in Q1 2020
  • Expects Q1 earnings per share of $2.97, up from Q1 2020 of $1.57

ii round-up:

Global streaming provider Netflix (NASDAQ:NFLX) reported an additional 8.5 million new net subscriber adds in the final quarter of 2020. That takes its total audience to 203 million. 

The maker of shows such as Tiger King and Bridgerton also predicted an end to the company’s need to borrow money in order to finance day-to-day operations as it hopes to turn cashflow positive during 2021. 

Netflix shares rose by more than 10% in after-hours US trading following the quarterly results, leaving them up more than 70% over the last year. 

Shares for Prime operator Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) are up by similar amounts as populations have shopped, worked and viewed more TV from home under the global pandemic. Shares for Disney Plus streamer Walt Disney (NYSE:DIS) are up around 20% over the last year, hindered by the impact of pandemic closed theme parks and movie release cinema disruption on its on its overall performance. 

Netflix free cash flow breakeven in 2021 would combine with its current $8.2 billion cash balance and $750 million of undrawn credit. That leaves it now contemplating potential returns of cash to shareholders via share buybacks. It intends to maintain a level of gross debt at between $10 billion to $15 billion. 

Full-year 2020 paid net subscriber additions of 37 million made for a 31% increase from 28 million net adds in 2019 and is an annual record. Over 80% of the new subscribers for 2020 came from regions outside of its home North American market. 

Operating profit over the year spiked by 76% to $4.6 billion. Its latest quarter earnings were hindered by a foreign exchange drag coming from its Euro denominated debt.

ii view:

Founded in August 1997 providing DVDs, Netflix launched its online streaming service in 2007. Today its services are provided in over 190 countries. Overseas revenues during 2020 overtook those of its home North American market at around 55% of the group’s total. A move to cash flow positive, giving it more flexibility with its finances, comes some two years before analyst predictions.  

For investors, some likely slowing in new subscriber numbers given the rollout of vaccines over 2021 needs to be considered. A one-year prospective price/earnings (PE) ratio of around 90, similar to Amazon, also suggests investors are already pricing in a considerable amount of good news. But Netflix continues to embrace the competition from new entrants, believing it is a sign of growth in on-demand viewing as opposed to historical linear viewing. A move to being cashflow positive could also see it returning an estimated $2 billion to shareholders during 2021, offering some share price support. And a future move into sport content could also occur at some point. In all, Netflix's position as a favourite stocks is understandable given first mover advantage, recent performance and potential future growth.

Positives: 

  • Contemplating share buybacks in 2021
  • Heavy investment already made in building a leadership position

Negatives:

  • Growing competition from Disney, Apple and others
  • Suffered programme making disruption due to Covid-19

The average rating of stock market analysts:

Buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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