Netflix will speed up cash burn in 2018, but analysts aren't worried

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Netflix said that it’s growing faster than it had expected, allowing it to invest more in original content that it had planned. (Netflix)

Netflix just uncorked a blockbuster fourth quarter and with it intentions to burn cash faster in 2018. But media industry analysts seem unfazed by the accelerated investments.

Netflix blew past Wall Street estimates and added 8.33 million new subscribers during the quarter—nearly 2 million U.S. subscribers and 6.36 million international subscribers.

Both of those totals well eclipsed both Netflix’s estimates for the quarter and Wall Street estimates. Wall Street expected Netflix would add 1.28 million domestic and about 5 million international subscribers. Total revenue for the fourth quarter was $3.28 billion, up 32.6% year-over-year. Net income reached $186 million.

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Netflix said that it’s growing faster than it had expected, allowing it to invest more in original content that it had planned. As a result, the company is anticipating a negative cash flow of $3 billion to $4 billion, up from the negative $2 billion in 2017.

The company now intends to spend between $7.5 billion and $8 billion this year on programming, along with a marketing budget now set at $2 billion and a technology and development budget set at $1.3 billion in 2018.

But UBS analyst Eric Sheridan said considering the subscriber momentum that Netflix’s Q1 estimates suggest for next year, revenue should continue to rise up to meet the accelerated spending.

“While the opex and content guide both imply continued heavy levels of investments, we challenge investors to measure any of those investments against the long-term value (sub breadth, pricing power, unit economics, & moat) that are being created by NFLX mgmt against both the current (& potential future) competitive environment. In our view, the broad outlook post this result is positive on a risk/reward basis going forward,” wrote Sheridan in a research note.

Jefferies analyst John Janedis also said that Netflix’s faster cash burn shouldn’t hold the company back from expanding margins.

“Mgmt's outlook for marketing spend, programming costs, and FCF burn was higher relative to our expectations. Overall, we now expect total programming spend could approach $8.0B in '18, driving cash burn of $3.5B (from $2.0B in 2017). However, largely driven by higher ASP (both US and Int'l) we expect mgmt can deliver on guidance for 300 BPS in operating margin expansion (18E: 10%, from 7% in '17),” Janedis wrote in a research note.