Company / Analytics

Analytics, 20 January 2021

Netflix stock surges after Q4 earnings report

Netflix is the world’s largest video-streaming service provider, with more than 200 million subscribers across the world. Netflix added a record 37 million paid subscribers in 2020, boosting its global members by 22% to more than 200 million for the first time.

Netflix is among companies that benefitted from the COVID-19 pandemic. Signups surged last year as lockdowns and travel restrictions forced millions of people to spend more time at home, and government closures of gyms, stores, and restaurants severely limited their leisure options.

Growth increased in international markets, as the company added 7.7 million new users outside of the U.S. and Canada in the quarter, with a whopping 4.46 million coming from Europe, Middle East, and Africa, or EMEA, region. Its annual revenue surged 24% to $25 billion as a result, driving its operating income up 76% to $4.6 billion. Netflix also reduced its free cash outflow from $1.7 billion in the fourth quarter of 2019 to $300 million last quarter and expects it will shrink to around zero this year.

Here’s how Netflix performed in the quarter:

Outlook

In its earnings release, Netflix said that “we believe we no longer need to raise external financing for our day-to-day operations.” The company raised its cash flow guidance for 2021 by $1 billion to breakeven. Considering Netflix’s business model has long required debt to operate, this improved free cash flow outlook is being embraced by the bulls.

Netflix has been working towards this moment for multiple years and is now in a unique position to continue its aggressive content spend while still generating significant future cash flows. The company also signaled it may resume stock buybacks soon, as it did from time to time from 2007 to 2011. It is not surprising that the subscribers are increasing in the international market compared to the more mature markets of the U.S. and Canada (UCAN) expansion. UCAN is a relatively mature market for Netflix compared to its international regions. But that doesn’t take away from how impressive those numbers were.

Growth in international markets will continue to push Netflix into the future. Analysts say content that appeals to those markets, for example, shows like Germany’s “Barbarians” and South Korea’s “Sweet Home,” are driving consumers to Netflix, and even translating to hits in the U.S. The French series “Lupin” recently cracked Netflix’s Top 10 most popular shows in the U.S., topping out in the number two slot.

But Netflix’s international expansion strategy isn’t just helping it build out its audience in new markets — it’s also helping keep viewers interested in established ones. Competition is heating up for Netflix both domestically and internationally. Netflix’s way of fighting back is its local content. The company said this has proven helpful in drawing subscribers and keeping them hooked.

In Q4, Netflix had to contend with several new competitors in streaming including Apple TV+, Discovery+, Disney+, HBO Max from AT&T’s WarnerMedia, and Peacock from CNBC parent NBCUniversal. Still to come is ViacomCBS’s Paramount+.

However, since recent subscriber growth was positively impacted by the pandemic, Netflix will likely see its rate of new subscribers slow down once the pandemic-related-lockdowns ease up. Subscriber numbers for 2021 could pale in comparison to the last quarter of 2020.

Should you buy or sell Netflix stock?

The current consensus among 41 polled investment analysts is to buy stock in Netflix. The 37 analysts offering 12-month price forecasts for Netflix Inc have a median target of 650.00, with a high estimate of 753.00 and a low estimate of 340.00. The median estimate represents a +10.90% increase from the last price of 586.13, according to CNN Business.

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