When Netflix will cease to have negative free cash flows: Morgan Stanley

While Netflix has turned from David into Goliath, there has been a persistent question lurking around the positive chatter: when will this company stop burning money?

Netflix said it expects its negative free cash flow to reach $ 3 billion in 2018, compared to $ 2 billion in 2017 (we will certainly know when it will report earnings on January 17th).

Why is that number going up?

Netflix CEO Reed Hastings explained the reason for the increase in cash burns in 2017.

"When we produce an incredible show like" Stranger Things ", there's a lot of capital in mind, and then you get paid for many years," Hastings said. "And seeing the positive returns on this for the company as a whole is what makes us feel comfortable that we should continue investing."

Netflix's original series production as "Stranger Things" has grown in recent years, and the company has made moves to own the entire pipeline production and distribution by signing big names like Shonda Rhimes and Ryan Murphy in chords for hundreds of copies millions of people. This strategy has been validated by the fact that competitors from Disney to AT & T have announced their streaming services and the licensing market for television and film programs has become increasingly crowded. Netflix needs original productions – and many of these – to support subscriber growth.

But as Hastings noted, doing a quality television show requires a lot of money up front. And it is difficult for investors and analysts to assess what value of IP will be worth for Netflix during its lifetime – or even what the entire Netflix TV and movie library is worth in total.

Some shows like "Friends", which Netflix has recently renewed streaming rights at a reported cost of up to $ 100 million, retain tremendous value as part of the service streaming library. But the value for other shows fades quickly. And the difficulty in judging that rate of deterioration makes it difficult to evaluate the new original shows of Netflix and its library over time.

This is one of the reasons investors will breathe a sigh of relief when Netflix's free cash flow becomes positive, and the Netflix accounting piece that requires a little bit of faith is made clearer. Until then, Netflix will continue to use billions of debts to finance its productions.

But there are signs that Netflix's free cash flow will become positive in 2021, according to a recent note by Morgan Stanley analysts.

"Even as expenses increase, the unit economy continues to improve, with margins benefiting from the size and power of prices: exclusive global originals are a key factor in the Netflix model, with greater involvement and a low rate of neglect ", analysts wrote. "While the level of spending on cash has increased, Netflix continues to generate greater revenue contributions per subscriber, which has risen by more than 30% per year over the last two years while the gap between cash spending and amortization of the content is closed, we see a free flow of cash flow to achieve a break-even in 2021E, with a strong expansion later fueled by the continued adoption of subscribers and the growth of ARPU. "

And it will continue to rise from there, with analysts expecting to reach over $ 5 billion in 2023 and over $ 10 billion in 2025.

Here is a chart a chart showing how Morgan Stanley expects it to progress over the next few years:

Morgan Stanley