2019 might eventually be remembered as the most important year in Netflix’s history.
The streaming giant is burning through cash, and suddenly facing competition from the entertainment industry’s biggest names. But by all indications, as it prepares to release its earnings from the final quarter of 2018, the company is coming out swinging.
Investors have already welcomed a US price hike announced this week that was widely seen as a way to help bankroll Netflix’s massive investments in programming. The company is ramping up its TV and movie offerings as competitors such as Disney, WarnerMedia, Apple and NBCUniversal prepare to launch their own services.
Some see the aggressive increases — $1 to $2 depending on the subscription plan — as a decision that the company is making from a place of strength. Netflix (NFLX) said it had about 137 million subscribers worldwide last fall, and investors hope that number will swell even more when the company releases updated numbers.
“I can’t imagine that Netflix would raise prices just two days ahead of earnings if subscriber growth in the fourth quarter were weak,” Michael Kramer, founder of Mott Capital Management, wrote in a research note Tuesday.
The company expected to reach 147 million subscribers worldwide by the end of 2018, according to projections from last fall. It’s worth noting that there will be some tweaks to the formula when it reports results Thursday — the company will no longer highlight people who have a free trial for the service, a number it says adds “noise to our membership forecasts.”
Subscriber numbers are an obviously important metric for the streamer, which long ago solidified its status as the leader of the pack. It now has more customers overseas than it does in the United States, and is investing in new content for markets such as Europe, Latin America and India.
But those kinds of investments are also expensive. Netflix said in 2017 it expected to spend at least $8 billion on content in 2018. That number might have gotten bigger. That gives investors a reason to be concerned about how Netflix is managing its balance sheet.
Netflix is burning through a lot of cash. The company said last fall that it expected to have negative free cash flow of $3 billion in 2018 — in other words, it’s spending a lot more than it is bringing in. Its expectations are similar this year. The streamer has also tapped the debt markets for roughly $5.5 billion since October 2017 to help fund its expansion.
Those numbers make this week’s price hike all the more important. As long as customers are game, the extra cash may help Netflix keep up with its ambitions to bolster its empire.
Neil Begley, senior vice president at Moody’s, described Netflix’s plan as “credit positive,” since it will reduce leverage, negative cash flow and the time it will take for the company to break even, assuming revenue growth outpaces its spending on content.
“We don’t believe that it will slow subscriber growth, as the new price points remain competitive relative to Netflix’s volume of original and licensed content,” he said in a research note this week. Moody’s thinks Netflix will continue to grow its subscriber base and reach 200 million paying customers in 2021.
Investors largely agree with the plan, too. Netflix’s stock jumped more than 6% Tuesday after the price hike was announced. The company has also made huge gains recently, even when compared to the broader market rally. Netflix stock has risen 30% in the last 30 days, and leads all others in the tech-heavy Nasdaq.
Netflix’s longterm dominance isn’t exactly guaranteed, though. There’s a reason it is spending so much money: It needs to ward off competition.
Disney (DIS), Comcast’s NBCUniversal (CMCSA) and AT&T’s (T) WarnerMedia, which owns CNN, all plan to debut their own streaming services either this year or next year. Apple (AAPL) is expected to launch some kind of service, too.
Those plans have raised a lot of questions about what would happen to Netflix if competitors were to pull licensed content from the service to make it exclusive to their own products. Disney already promised to do that.
The internet had a meltdown last month, for example, when it was rumored that Warner Bros. was pulling “Friends” from the service. Netflix and Warner Bros. made a deal to keep the sitcom on the service for 2019. That deal cost Netflix a reported $100 million.
CNN Business’ Frank Pallotta contributed to this report.