Going into 2020, a lot of the analysis on Netflix, Inc. (NFLX) was focused on how the streaming space was getting more and more competitive and whether Netflix's first mover advantages were waning. Then the pandemic locked many of us at home. We knew that the pandemic helped Netflix, but we are getting a clearer picture of just how much—and the market likes what it sees.

Key Takeaways

  • Netflix has passed 200 million subscribers, a new milestone for the streaming service.
  • The company has had great success with original content during the lockdown.
  • Netflix is starting to shift its focus to improving profitability in addition to growing revenue.

A Subscriber Milestone

In Netflix's letter to shareholders, the company made some key announcements that had investors excited before they were even past the first paragraph. One, Netflix has officially passed the 200 million mark in paid subscribers on the strength of 37 million subscribers added in 2020. Two, the company increased its annual revenue by 24% year over year, with $25 billion in 2020 revenue. Investors are used to seeing revenue growth from Netflix, but the core dollars are getting bigger even if the year-over-year growth is more modest than at some points in the company's past.

Subscribers and revenue are helping to get Netflix closer to something investors have wanted for a long time. Netflix is now on the cusp of becoming a free cash flow generating machine. Netflix anticipates that 2021 will be a break-even year. This is an improvement over a prior expectation of negative $1 billion. Once the company is firmly in the black, the plan is to repay maturing bonds and look at ways to return cash to shareholders—with ongoing stock buybacks explicitly mentioned.

The Competitive Landscape

Netflix finds itself in a fuller marketplace as traditional media companies have entered the streaming space in force. The Walt Disney Company's (DIS) Disney+ was an obvious concern for Netflix before the pandemic. To be fair, it still looks like a threat as it is rocketing toward 100 million subscribers. However, it is also looking like consumers are open to having multiple streaming services rather than committing to one over the other. Given its 2020 success, Netflix is confident that it can keep growing subscribers by improving the service.

This increased confidence comes despite more entrants like HBO Max, Peacock, and AppleTV+ joining established competition like Hulu and Amazon.com, Inc's (AMZN) Prime. Netflix has arguably taken another leap in using its user data to create engaging programming. "Tiger King," "The Queen's Gambit," "The Midnight Sky," and other Netflix originals have gone on to be tremendously successful. "Tiger King" became a cultural phenomenon during lockdown, and "The Queen's Gambit" has fueled a run on chessboards. This series of obvious commercial success may assuage the investors who were worried whether Netflix had the content creation chops to match established players like Disney and HBO.

The Market Reaction

The market has shown Netflix a lot of love throughout 2020, and that is continuing into 2021. Netflix stock popped over 12% on the earnings announcement and is hovering around 15% up as the market continues to digest the news. In the shareholder letter, Netflix gives its annualized 2020 share performance as 67%, handily beating the NASDAQ's still impressive 45%. These shareholders may find that it is just the start of the fun if Netflix can make its free cash flow dreams a reality.

The Bottom Line

The recent earnings pop has Netflix shares up over 77% from where they were in January 2020. That is an incredible run for Netflix shareholders. The more important news for investors, however, is that Netflix has shown that it can handle the stiff competition coming at it and that its original content strategy is paying off. The company has already cautioned that 2021 will not be as stunning, as 2020 was due to the global events that kept people home and watching. But even in that caution, there is a newfound confidence that Netflix continues to be a major player—and soon a cash-flowing major player—in the streaming industry that it pioneered.