Netflix One Question: Is It Losing Money Or Making Money?

Netflix stock (NASDAQ:NFLX) has emerged a star performer through the coronavirus pandemic, rising by ~25% year-to-date, as people consume more content while being confined to their homes. The company added close to 16 million subscribers over the first quarter, handily beating its guidance of about 7 million new subscribers. However, one key question investors are likely to have is whether Netflix is actually making money? The answer depends on whether you look at accounting profits or underlying cash flows. We answer this in our dashboard analysis Netflix Free Cash Flow: Why Is Netflix’s Profitability Improving While Its Cash Burn Is Accelerating? Parts of this analysis are summarized below.

Growing Net Income, Higher Cash Burn

Viewed from the lens of net income, Netflix has been performing well, with its net profits growing 3x from around $0.6 billion in 2017 to $1.9 billion in 2019. That said, the company has been burning cash, with free cash flows falling from -$2 billion in 2017 to -$3.3 billion in 2019. The sizeable difference between these two numbers is explained by how Netflix accounts for its content investments, amortizing (expensing) only a portion of its content each year on its income statement. The company’s cash spending on content is growing fast, rising from about $9 billion in 2017 to $14.6 billion in 2019. In comparison, the amortization of content has been relatively lower, growing from $6.2 billion to $9.2 billion over the same period. Netflix says that about 90% of the value of a show is expensed within 4 years of its debut.

Netflix content outlays have been growing not just in absolute terms, but also in terms of content spending per active subscriber and the company faces a paradox, in a sense. While it needs to rein in content spending in the long-run to boost cash flows, this could prove tricky, as subscriber growth could slow (or even decline) if it doesn’t keep updating its library at the same pace, given the competition in the streaming space with the likes of Disney, Apple, and the upcoming HBO Max vying for market share.

Cash Burn Should Decline In 2020, As Coronavirus Reduces Production

That said, 2020 could prove an interesting year for the company, as content production is likely to slow down with the pandemic, potentially reducing its cash spending on content. While the company previously indicated that it could see -$2.5 billion of free cash flow for 2020, it now expects the number to be less than -$1 billion.

Did you know Netflix content outlay as a percentage of revenue is 50% higher than Disney and Warner Media? Our analysis Netflix Ballooning Content Costs Have Eclipsed Revenue And Subscriber Growth breaks down Netflix content spending and compares it with key players.

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