A day after Netflix reported that its second-quarter slide in subscribers was much smaller than investors had feared, a different takeaway may sink in from the earnings report at the world’s largest streaming service: A years-long debate about whether Netflix is spending too much on content seems to be over now.
The key is that Netflix eked out a positive number for operating cash flow in the quarter, despite spending $1.3 billion more on content than it did in the first three months of this year, as it launched a new series of its “Stranger Things” franchise and wrapped up its $200 million “The Gray Man” action thriller. For the first half of the year, Netflix said it made $1 billion in cash flow – a number analysts say will double, and may triple, by 2023.
“Netflix’s revenue will grow 10% to 15% next year, but the content spend will grow zero,” said Robert Cantwell, manager of the Compound Kings Exchange Traded Fund in Nashville, which has 3.9% of its fund in Netflix stock as of July 19. “You’ll see $3 billion to $3.5 billion next year in free cash flow.”
Critics have long zeroed in on the fact that Netflix’s spending on new movies and TV shows has been more than its reported profits because of accounting rules that let the content investment be reported as expenses over several years. But that ended in the first quarter of this year, and was sustained in the second even with the extra spending.
Netflix said on its quarterly earnings presentation that it will keep content spending level at about $17 billion annually for the next couple of years. Two executives said spending would stay “in that zip code.” That’s up from $11.8 billion in 2020, and little changed from $17.7 billion last year.
The company spent most of earnings call talking about its plans to add an advertising supported tier to its service offerings, letting Netflix cash in on households that don’t want to pay $10 to $20 a month for a subscription. Many of those households are using passwords belonging to friends or family, skirting Netflix’s rules.
The combination of leveling off content spending and adding ad revenue is where the cash flow increase will come from, according to Cantwell and Evercore ISI analyst Mark Mahaney.
Mahaney says Netflix the company should reach $2.5 billion in 2023 cash flow and could reach $4 billion by 2024.
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