What will Netflix do with piles of money?
Netflix (NASDAQ: NFLX) made a very important announcement in its fourth quarter letter to shareholders. “We believe we no longer need to raise external funding for our day-to-day operations,” management wrote in bold italics.
CFO Spence Neumann expects the company to produce breakeven free cash flow for the year, and that number is expected to climb into positive territory in 2022 and beyond. The company will repay existing debt to a manageable level, then plans to return excess cash to shareholders through a share buyback.
But Netflix could reasonably be generating more than $ 10 billion in free cash flow each year by the middle of the decade. What will he do with his piles of money then?
Expand the service with new verticals
Netflix has subtly expanded its service over the past few years to attract a larger audience. Investments in films, unscripted animated films, adult animation and more have already produced strong engagement, expanding its audience and enabling continued price increases.
The media company is also investing more money in children’s programming and animated films. The movement could be a response to Disney‘s (NYSE: DIS) rapid rise in streaming. On the contrary, Disney + is proving the extent of demand for franchise animated films like its Pixar and Disney studio productions.
Netflix can use its excess cash to invest in other verticals that show strong engagement on other platforms. Several analysts have speculated that Netflix may acquire the sports rights at some point in the future. Chief Content Officer Ted Sarandos previously said sports were not at the heart of Netflix’s value proposition; there is nothing Netflix can add to the sports watching experience.
But in an interview with Variety in September, CEO Reed Hastings said sports and other content industries could make their way to Netflix in the distant future. “I doubt news, but sports, video games, user-generated content – if you think about the other big categories, one day that might make sense,” he said.
There is certainly potential for Netflix to add new verticals, but live programming like sports is well outside its wheelhouse. As with every new area Netflix invests in, it has the potential to start small and grow quickly if it sees success. And with a growing cash buffer, experimenting in other areas comes with a favorable risk-reward ratio.
Acquire content and intellectual property
Netflix may be more interested in acquisitions in the future if it has excess cash to spend. He has only made one purchase in the past; he bought the comic book publisher Millarworld in 2017. The first list of original series and films based on Millarworld characters will debut this year.
If Netflix can create popular content based on the acquired intellectual property, it might look to repeat the process in the future. It’s a strategy straight out of Bob Iger’s Disney playbook. Disney made several major acquisitions during Iger’s tenure, and he reinvigorated franchises and built a list of potential blockbusters over the next decade based on the intellectual property acquired.
Netflix could focus more on regional acquisitions that could continue its progress in attracting international audiences. Netflix has the advantage of being able to produce content for local markets with the potential to create global success. Disney, by comparison, tries to make a billion dollar box office hit with every movie release. Ultimately, more local acquisitions could present more opportunities and be a better investment for Netflix.
A long game
There is still a long way to go before Netflix is sitting on piles of money. After all, he only expects to break even this year. But with steady revenue growth and operating margin expansion expected to continue for years to come, it may only be a few years before the media company has more money than it can spend with its current strategic plans. While it’s nice to hand money back to shareholders through a buyout, many investors can be just as happy to see Netflix continue to invest for continued long-term growth.
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