Besides a single quarterly earnings beat, there are many things investor like. Netflix can appeal to both defensive and offensive investors.
1/ a stable positive FCF
For several quarters in a row, Netflix has delivered $1.5bn+ FCF/qtr, and expects 2024 FCF to be ~$6bn. Positive FCF is crucially important in today’s high-interest rate environment.
Btw, Netflix doesn’t need massive capex and doesn’t worry about utilization etc. However, Netflix does need to spend on contents.
This FCF is built upon a $17bn cash spend budget on content for 2024.
If not for the $1B in delayed spending due to the WGA and SAG-AFTRA strikes, 2024 FCF should be $7bn.
$7bn with 4-5% required fcf yield implies a $140-175bn market cap, which was where Netflix was trading at in 2023.
2/ growing TAM
Investors like an expanding TAM – like Amazon’s flying wheel model.
Internationalization was the first step: 2012 Netflix had <5mn paid subscriptions (incl. Canada).
By the end of 2023 (in 11 years), Netflix has ~180mn paid members outside of US & Canada – a more than 36-fold increase.
Now, Netflix has pretty interesting upside in non-video streaming businesses: such as ads and gaming.
“It’s a $600B+ opportunity revenue market across pay TV, film, games and
branded advertising — and today Netflix accounts for only roughly 5% of that addressable market”2023q4 Netflix letter to shareholders
3/ Shareholder return
2023Q1 buyback: $400mn
2023Q2 buyback: $645mn
2023Q3 buyback: $2.5bn
2023Q4 buyback: $2.5bn
Its capital allocation strategy:
The first priority for our cash is to reinvest in our core business
and to fund new opportunities like gaming and ads, followed by selective acquisitions;
Target maintaining minimum cash equivalent to roughly two months of revenue (e.g., about $5.4B based on Q1 revenue).
After meeting those needs, we anticipate returning cash to stockholders through share repurchases.
