Netflix, Inc.’s Spending on Content Is Good for Share Price

Netflix stock - Netflix, Inc.’s Spending on Content Is Good for Share Price

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If you had never read anything about Netflix, Inc. (NASDAQ:NFLX) before the video-streaming company announced its fourth-quarter 2017 earnings January 22, you likely would have gagged at the line in the press release that said free cash flow (FCF) would be between negative $3-$4 billion in 2018.

That’s a significant burning of cash. And it’s a big reason some investors have avoided Netflix stock as its share price has moved from $26 to $292 in just five years.

Positive free cash flow, to many, is the Holy Grail of financial metrics. If you’ve got more going out than coming in, eventually you end up in the poorhouse.

Right? Well, usually, but Netflix is a unique business.

Negative View on Netflix Stock’s Lawrence Meyers recently poured cold water on the company’s global expansion. He suggested figures as high as 400 million subscribers outside the U.S. are pure poppycock.

“Yes, international subscriptions are adding up quickly. International sits at about 65 million subscribers, having increased by about 18 million in 2017,” Meyers wrote February 23. “NFLX would have to add 25 million subscribers every single year to get to 390 million in ten years. That is to say, maintain 25-40% growth through that period.

“Not gonna happen.”

Lawrence is a bright guy so let’s assume he’s right and Netflix can only get to 200 million international subscribers over the next ten years. Under this scenario, it would have to grow its international subscriber base by approximately 11% per year, a very reachable figure, given it increased international paid subscribers by 40% in Q4 2017 year over year and 10% sequentially.

That’s good news for Netflix stock.

How Much Will Netflix Stock Cost?

Netflix currently spends approximately $45 for every new international subscriber it acquires, about the same amount as the company paid five years ago to acquire U.S. subscribers.

So, it wouldn’t be inaccurate to suggest its international business is at about the same place on the growth curve to where its U.S. business was in 2013.

Over the past five years, Netflix’s U.S. paid subscribers grew 107% on a cumulative basis from 25.5 million at the end of 2012 to 52.8 million at the end of 2017. It’s acquisition cost over the same period increased by 89%.

As long as the first figure grows faster than the second figure, whether domestically or internationally, the business is heading in the right direction. That too is good for Netflix stock. 

Why Netflix Stock Moves Higher

All one needs do is go to Netflix’s latest 10-K under the Free Cash Flow and Capital Structure heading to get the answer.

“We are increasing operating margins and expect that in the future, a combination of rising operating profits and slowing growth in original content spend will turn our business FCF positive,” stated the 2017 10-K.

So, when Netflix throws out a number for its content budget — between $7.5-$8.0 billion in 2018 — it’s doing so with that in mind.

Five years ago, Netflix had 33.3 million total streaming subscribers and an operating profit of $50 million. That meant an operating profit of $1.50 per subscriber. Today, that number is $6.93 or 362% higher.

As long as this figure continues to rise, Netflix is going to keep spending on content. And living with negative free cash flow.

In return, investors will get a higher Netflix stock price.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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