Eight years ago Netflix said it was on the cusp of a “defining moment”: having stocked its library with films and television series first seen elsewhere, the streaming platform had invested a mooted $100 million in its first original production (Callum Jones writes). What is more, it was preparing to buck convention and release every episode of House of Cards at once.
Tired of spending heavily on other studios’ content, Netflix invested even more heavily to develop its own. Many hundreds of original films and shows have followed, with myriad hits and forgettable misses.
It has burnt through cash to build up this vast catalogue of exclusive titles, borrowing more than $16 billion. But after a rollercoaster year carried its audience of paying subscribers above 200 million, the technology group has hailed another defining moment: it no longer requires external financing to fund its day-to-day operations.
In future Netflix, holding between $10 billion and $15 billion in gross debt, says it will have enough money to both repay its loans and continue to spend on content. The California-based company is also considering its first share buybacks since 2011.
This is a significant milestone, which should go some way to allay the concerns of those who feared its splurge on original releases was akin to a house of cards.
The former DVD mailout service is today one of the world’s largest internet companies, with a market value of $250 billion. Its shares rose yesterday 14 per cent to trade at $571.99 after this week’s update.
In forcing millions of people to stay at home and reach for the remote, Covid-19 prompted a huge rise in viewership. Netflix attracted 37 million new subscribers over the past 12 months, raising questions around whether rapid expansion during the pandemic has brought forward growth from the future.
Even so, 2020 cemented its status as the dominant player in an increasingly crowded market. Not long ago Netflix was the upstart; now the establishment’s after its lunch.
In 14 months Apple, NBC Universal, Warnermedia and Disney have joined the fray with their own streaming platforms. The last attracted almost 87 million paying subscribers and is expanding at pace.
About time, Netflix observed in its quarterly letter to shareholders. It has been awaiting the arrival of those it calls “legacy competitors” for years. “This is, in part, why we have been moving so quickly to grow and further strengthen our original content library,” it wrote.
Some of these newer players will stumble in the coming months and years. Making headway in this battle requires deep pockets, sharp elbows and more than a smidgeon of luck. About 83 per cent of the new Netflix subscribers last year were outside the United States and Canada, with growth in Asia-Pacific countries up by almost two thirds.
The company knows the path its rivals now tread, and the award-winning successes and expensive failures they will encounter. More than 100 million households have watched The Crown, but Netflix does not publish audience data for the dozens of other series that have fallen by the wayside.
It expects to add a further six million subscribers in the first quarter — shy of expectations on Wall Street — with revenues of $7.13 billion and net income of $1.36 billion, almost doubling from the same period last year.
When shares in Netflix came under pressure in the autumn after its weaker-than-billed third quarter, Tempus advised readers to consider the bigger picture for this ever-more efficient and profitable business. Lockdowns won’t last forever and its competitors will gain ground, but this recommendation stands.
ADVICE Buy
WHY Expensive bet on original content starting to pay off — just in time
JD Wetherspoon
He may not be everybody’s cup of tea, but Tim Martin knows his pubs (Dominic Walsh writes). Among his fans is Columbia Threadneedle Investments, which topped up its 13.6 per cent stake in JD Wetherspoon by snapping up another 1 million shares in Tuesday’s equity-raising for a total outlay of £11.2 million.
The placing, at £11.20, was the pub company’s second equity-raising during the pandemic, following on from one in April last year, when it raised £141 million at 900p. Wetherspoon’s, founded by Mr Martin in 1979, is the first hospitality company to come back for seconds, but with the lockdown closures predicted to run at least until the end of March, it will not be the last.
In his analysis of why a second equity-raising was necessary, Tim Barrett, head travel and leisure analyst at Numis, said the group of 872 pubs appeared to have been caught out by its £75 million liquidity covenant. He said this implied lower than expected headroom of £64 million and without the new funds its monthly cash-burn of £17 million would have enabled it to ride out less than four months of closure.
As if the term cash-burn was not too jargony already, Mr Martin appears to have invented his own financial metric of “owners’ earnings”. He said he considered this to be “a fair measure of cash burn”, although I cannot see it passing muster with the IFRS accountancy regulations.
In the trading update that accompanied the share placing, the company gave a detailed account of all the measures it is taking to preserve its cash as it battens down the hatches even more tightly than before. Times are clearly tough, but with an extra £93 million in his back pocket, the Brexiteer Wetherspoon’s chairman will come through the pandemic. With Mr Martin not participating in the equity-raise, his personal stake falls from 27 per cent to 25 per cent, well below the 32 per cent he was sitting on before the pandemic. Having turned 65 last year, it begs the question of whether he is starting to formulate retirement plans once he’s navigated the business through the coronavirus crisis.
ADVICE Hold
WHY The pubs sector is being hammered but if anyone can make it through the crisis it’s Tim Martin
