Netflix loses the battle, but it’s still on target to win Wall Street’s war

Technology

Ted Sarandos attends the Ted Sarandos panel during Netflix ‘See What’s Next’ event at Villa Miani on April 18, 2018 in Rome, Italy.

Ernesto S. Ruscio | Getty Images

It wasn’t Netflix‘s finest quarter, but if you’re a long-term Netflix believer, you’ve got reason to smile.

The streaming video giant reported 300,000 fewer global net subscriber additions than it forecast. Netflix shares fell about 6% after hours.

The quarterly results shouldn’t distract faithful Netflix bulls from the driving reason they’ve been investing in the company, summed up concisely in three sentences from the company’s shareholder letter.

“For the full year 2020, we forecast [free cash flow] to be approximately $2 billion, up from our prior expectation of break-even to positive,” Netflix wrote. “We expect our FCF profile over the coming years to continue to improve as we increase our profitability and our transition to the production of Netflix originals matures.”

And then:

“With $8.4 billion in cash on our balance sheet at the end of the quarter plus our $750m credit facility (which is undrawn), our need for external financing is diminishing.”

The exact numbers aren’t the important part. Here’s the bottom line: Netflix is no longer burning cash.

It has been borrowing billions each year to fund its plethora of original and licensed shows and movies. Believers in Netflix have predicted that as the company’s price-value proposition wins over the global population (with a product far cheaper than traditional pay TV in almost all regions of the world), it will eventually be able to fund its own programming without lending. This will propel the company into a reliable money-maker with plenty of growth runway ahead of it.

The company said Tuesday that it’s closer than ever to getting there. The grand plan is on track. Sure, the subscriber trajectory isn’t great — from 15.8 million additions in the first quarter to 10.1 million in the second quarter to 2.2 million in the third quarter. But Netflix warned investors of this earlier this year, saying last quarter that most people who wanted Netflix for pandemic quarantines had already signed up.

The big story isn’t the subscriber miss. It’s that Netflix gets closer to self-funding. And that’s music to the ears of Netflix shareholders.

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