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Netflix Sees More Free Cash in the Future

Netflix (NASDAQ:NFLX) has seen its shares lose almost a quarter in value just in the past six months. The $126 billion internet entertainment services company's stock has received much less fanfare, despite consistently beating Wall Street earnings expectations quarter after quarter. A closer look reveals that it has failed to beat a company-specific metric, subscriber additions, amidst the rising threat of competition from deep-pocketed tech and media giants.


Netflix's stock price seems to have reached a strong resistance near $390 a share this summer, and has not been able to recover, despite beating earnings expectations in its succeeding quarterly reports.

The company's stock is down about $100 bucks a share ever since it failed to meet its own subscriber additions target this summer. For Netflix's quarter that ended in June, the company forecasted 5 million paid subscriber growth but delivered only 2.7 million. For its quarter that ended in September, it forecasted 7 million subscriber growth but reported 6.8 million. For the two quarters, Netflix failed to achieve its target growth in its domestic (United States) operations by 426,000 and 283,000, respectively.

So far this year, Netflix's domestic streaming services delivered more than twice the profitability compared to what its international operations are bringing in.

Nonetheless, Netflix's subscribers has multiplied this year. The company now has a total of 158 million subscribers compared to 137 million a year ago.

Netflix also has demonstrated its customer stickiness despite raising its subscription fees by $1-$2 a month early this year. The higher fees only caused the company to suffer a 0.1% loss in subscribers.

Netflix remains positive despite these subscriber shortcomings, which have likely been brought on by increasing competition from Apple TV+ and Disney+. The company sees this increasing competition as a repeat of the past, when broadcast TV transitioned to cable TV. With this in mind, this may mean viewers or subscribers will be shared among different platforms instead of one taking a major market share.

From the first to third quarter of this year, Netflix was able to deliver 27% revenue growth and 19% profit growth. The company remained free cash flow negative at -$551 million compared to $860 million a year ago as it invests more on original programming rather than reruns, and it has a debt of $12.4 billion compared to an equity of $6.9 billion.

For the fourth quarter, Netflix forecasts another 30% growth in subscribers, planning to add 7.6m global paid net subscriber compared to 8.8 million a year ago.

Netflix remains a favorite among Wall Street analysts as it has 26 Buy and just 2 Sell recommendations as of late, with an average target price of $373 a share (30% potential upside).

Disclosure: Long Netflix.

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This article first appeared on GuruFocus.