Netflix analyst singles out ‘biggest takeaway’ from Tuesday’s Q4

Written by: Jayson Derrick
January 20, 2021
  • Shares of Netflix soared more than 15% Wednesday after reporting Q4 results.
  • Netflix reported many encouraging metrics, including strong subscriber and revenue growth.
  • One analyst singled out Netflix's cash flow as the most important takeaway.

Shares of Netflix Inc (NASDAQ: NFLX) skyrocketed to a new all-time high Wednesday morning and the 15% gain as investors had plenty to cheer from its Q4 report. But according to CFRA analyst Tuna Amobi, the “biggest takeaway” from the earnings release makes it clear the company can self-finance its operations.

The many catalysts

Netflix investors drove the stock higher Tuesday afternoon as the media giant reported several encouraging metrics, including the addition of 37 million paid subscribers throughout 2020 to more than 200 million after adding 37 million new users in the fourth quarter. Annual revenue was up 24% year-over-year to $25 billion and operating income rose 76% to $4.6 billion. Here is an Invezz report summarizes Netflix’s Q4.

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According to Amobi, the most notable aspect of the report is Netflix’s confirmation it is generating sufficient cash flow to become “self-financing,” the analyst said on CNBC Wednesday morning

“This is something that has been a long time coming and really changes the way investors should be thinking about the business model and the valuation,” the analyst said.

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Cash flow positive

Netflix’s business has evolved to become a virtuous cycle where subscriber growth translates to revenue growth, the analyst said. His financial models assume Netflix will be able to grow revenue by at least 20% over the next several years. Backed by a subscriber growth of at least 25 million users per quarter, Netflix has 300 to 500 basis points of margin expansion potential.

More important, Netflix can sustain a positive cash flow on a going-forward basis and frequent tapping of the debt market is now a relic of the past, the analyst said.

More positives from Netflix’s Q4

Meanwhile, subscriber growth was above and beyond even “our wildest expectations” while other metrics like margin expansion and international growth continued to accelerate despite the thesis that Netflix benefited from pull-forward demand.

This may suggest the stay-at-home theme that dominated 2020 is still in place for 2021, the analyst said. The longer-term outlook looks to be just as promising, especially when adding in the potential for a share buyback program.

Management’s announcement of plans to return capital also comes at a time when major competitors are “breathing down its neck,” the analyst said. From an investor perspective, this sets up the stock really well over at least the next three to five years.

During this time period, investors may start to model Netflix more as a traditional media company and this would be a positive development as it would warrant higher valuation metrics and comparisons.