Netflix Inc. is no longer a hypergrowth company, so executives are trying to showcase an improvement that was once one of Wall Street’s prime worries about the company: free cash flow.
Netflix NFLX, +5.61% executives said Tuesday they expect to see positive free cash flow on an annual basis this year, in a letter to shareholders, and projected “substantial growth in FCF in 2023 vs. 2022,” due to increasing revenue, solid profitability and the successful multi-year evolution of its content model, which is now producing more content than it buys from other companies.
Netflix’s free cash flow expectations were buried behind better-than-expected subscriber losses, and a forecast for subscriber numbers to start growing again in the current quarter, which is expected in part when the the elevated churn rates in subscribers related to its recent price hikes end. But it is important to note, because the topic of free cash flow has long been a thorn in Netflix’s side when it comes to Wall Street.
Netflix has had to spend profusely to purchase content and eventually develop its own exclusive properties as it grew into a streaming giant. But now, executives believe that those profligate spending days — which included five years investing in building its own production studio — are over.
“We’re now through the most cash-intensive part of that transition,” Netflix executives said in their shareholder letter, referring to the transition from running content from other studios to mostly showing its own.
Netfliix said that its peak negative free cash flow was $3.3 billion in 2019, and that its content spending is going to decline going forward, “assuming no material expansion into new content categories in 2023.” On the company’s video interview with J.P. Morgan analyst Doug Anmuth, Netflix Chief Financial Officer Spencer Neumann said the company was on track to spend about $17 billion this year on content. Anmuth noted that about half of the investors he talks to want content spending to be “reined in a bit,” to come down, while the other half want it to continue to look for more hits globally.
Company executives first mentioned the possibility of being free cash flow positive in January, while offering a shockingly disappointing outlook that shaved off nearly $50 billion in market cap. That was the beginning of a rough year for the stock, which is down 68% year to date, but shares turned around in after-hours trading Tuesday, gaining nearly 8%.
This column has been noting Netflix’s maturation into a slower growth company, after the pandemic-fueled streaming boom came to an end. But as revenue growth slows, and the company turns more to share buybacks to add shareholder value, could a dividend also be in its sights?
Read: Netflix admits that it’s time to grow up but Wall Street isn’t happy about it
It remains to be seen if a positive free cash flow Netflix can win back those still disappointed investors, who have long been focusing on subscriber growth. But as those numbers slow and a mature Netflix emerges, investors are going to need some new metrics — and cash, as they say, is always king.