Don’t Worry About Cash Burn — Netflix Should Be Cash Flow Positive in 5 Years

FAN Editor

Let’s face it: Netflix, Inc. (NASDAQ: NFLX) has been spending boatloads of cash on content. In the company’s first-quarter financial report, Netflix confirmed that it would be spending between $7.5 billion and $8 billion on content in 2018, a significant increase from the $6 billion budgeted for 2017.

That spending and the resulting negative free cash flow are the reasons most cited by Netflix bears in professing their doubts about the company. Netflix expects free cash flow in a range of negative $3 billion to $4 billion in 2018, after a negative $2 billion for 2017.

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Analyst Neil Begley from Moody’s has run the numbers and thinks that will all change relatively quickly.

Escalating subscriber growth is the ticket

Earlier this month, Moody’s raised the credit rating on Netflix’s debt, based on the company’s growing revenue and ever-increasing subscriber growth rates. Begley said that while the company’s debt-to-EBITDA ratio (which measures how long it will take it to pay down its debt) is currently “high” at 7.3, he expects to see revenue increases of more than 20% in each of the next three years, bringing that ratio “comfortably under 5 times by 2020.”

Begley believes that Netflix will exceed “200 million subscribers” by the end of 2021, while increasing profit margins will turn the company cash flow positive by 2022:

A quick review of Netflix subscriber growth in recent quarters shows that the analyst’s forecast is easily achievable:

Begley used conservative estimates for growth, as Netflix could reach over 200 million subscribers with just 15% year-over-year growth, though it has been growing at closer to 25% year over year in each of the last four quarters. Assuming revenue growth of 20% was similarly conservative, as Netflix revenue has grown by more than 30% year over year in each of the last two years.

Starting with 2017 revenue of $11.69 billion, and assuming 20% annual revenue growth, the company would see:

  • $14.03 billion revenue in 2018
  • $16.84 billion revenue in 2019
  • $20.20 billion revenue in 2020

It’s cheaper in the long run

The reason Netflix is spending so much money on its original programming is simple economics. When the company licenses shows from other providers, it’s essentially paying rent. While that may be less expensive over the short term, it’s undoubtedly more costly over time. As with buying a house rather than renting, generating its own content has higher up-front costs — but thereafter Netflix owns the content, adding to its growing cache of intellectual property. Owned content becomes much less expensive when the cost is spread among the company’s growing customer base.

Netflix’s consistently strong subscriber growth has gone a long way toward validating its content strategy — and it may soon reverse the company’s negative cash flow.

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