If there were any remaining skeptics among investors, Netflix’s fourth-quarter results may well have silenced them.
The final months of 2020 will be remembered as the culmination of the streaming behemoth’s controversial decade-long strategy to invest in content, spend cash and grow its debt load. Validation came Tuesday after market close, when the stock surged a staggering 12% during the after-hours session.
With the jaw-dropping 8.51 million global subscriber additions, Netflix shot well past analyst expectations, all the more impressive when you consider that competition in the streaming space is the fiercest it’s ever been, thanks to newer entrants like Disney+, WarnerMedia’s HBO Max, NBCUniversal’s Peacock and a slew of others.
Perhaps most impressive was Netflix’s international subscriber growth. The company said 83% of 2020’s net sub additions of 37 million came from outside the U.S. & Canada. Paid net sub additions in Asia Pacific region grew 65% year-over-year, and subscriptions in Europe, the Middle East and Africa accounted for 41% of Netflix’s full paid net adds.
To be frank, many doubted Netflix’s ability to continue growing its subscriber base in the important U.S. and Canada market. Despite that negative noise, the streamer added 860,000 subs in the region in Q4 compared with 550,000 in the same period last year.
Last year, Netflix blamed the underwhelming Q4 domestic numbers on a previous price hike to the service. And yet in this fourth quarter, strong subscriber growth came even as Netflix hiked prices in several markets recently. In October, the company increased prices of its services in the U.S. and Canada. A January hike in the U.K. is likely the first of more to come in that region in 2021.
At the time of the price hike announcement, many were concerned that the increases would lead to higher churn. But if Q4 and 2020 were any indication, Netflix proved it has strong pricing power due to its robust content library.
Netflix has long been known to spend vigorously on content at the expense of its balance sheet. The company raised $15 billion in debt since 2011 to help fund its business but plans to use its $8 billion of cash on hand to pay back its outstanding debt, which matures this year.
Thus, Netflix now expects to be free cash flow neutral this year and free cash flow positive every year after 2021. On top of that, it said it won’t be needing any additional external funding in order to finance its operations. If that didn’t satisfy investors, Netflix also announced it could possibly start share buybacks, something it hasn’t done since 2011. That’s how bullish Netflix is on itself.
Disney previously indicated it plans to follow Netflix’s strategy of spending aggressively on content as it looks to play catch-up to the incumbent. Both Netflix and Disney’s moves to focus on growth and content above all else proves that fickle consumers, and even investors, care more about investments in the future than the current state of a balance sheet.
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