Netflix surprises investors with a big fourth-quarter earnings report — profitability and share buybacks in sight

Netflix handed investors a perfectly splendid earnings report — sending its share up 16%.

• $6.64b in sales vs. $6.6b expected
• 8.5m new subscribers vs. 6.64b subscribers expected
• 203m total subscribers — passing 200m for the first time

But the bigger surprise is in what comes next…

Playing chess while competitors play checkers

Netflix made all the right moves early on — switching to a streaming model and developing its own content.

Despite accumulating $16b in debt to fund its content creation, Netflix’s strategy is paying off. 9/10 of the most Googled TV shows were created by Netflix in 2020.

But checkers playing competitors made significant moves in 2020 to catch up:

• Disney ramped up annual content spend to $14-16b with 100 new titles/year.
• Warner Media movies will debut on HBOMax the same day it’s released in theaters to attract subscribers.

COVID lockdowns accelerated the growth of many streaming services. This led many to believe that growth would become unsustainable as COVID dragged on… After all, you’d think everyone who would’ve signed up, already signed up.

But Netflix proved everyone wrong.

Here’s where it really matters…

Netflix delighted investors with strong numbers but here’s what surprised investors the most — notes from its CEO.

With $16b in debt, the company is deep in the hole — but Netflix expects to become “cash flow” breakeven in 2021.

• Meaning… Netflix likely won’t need to borrow any more money to fund its content development.

But here comes the even better news — Netflix will be exploring stock buybacks from shareholders.

• Meaning… By buying back stock from existing shareholders, the value of remaining shares goes up. Share buybacks also signal to investors that management may believe its stock is still undervalued.

For investors… At this size, where do you go from here?

In 2021, Netflix made its way into 75.3% of US households. To continue growing its sales, Netflix has:

• Increased its US prices by 8% for its standard plan and 14% for its premium plan in Oct. 2020.
• Expanded internationally — with 83% of new subscribers coming outside US and Canada.

Netflix is doing all the right things but its large size eventually will become a problem. They’re slowly transitioning from a growth company to mature company.

What to expect from a mature company: Slower but more stable returns and potential dividends in the future.