Can Netflix maintain its positive cash flows?
The first real test of the wider technology segment in US equity markets will be tomorrow when Netflix reports Q3 earnings after the market close. Netflix shares have been riding the Covid-19 bonanza in technology stocks up 64% this year elevating expectations for strong Q3 numbers. But the Q2 numbers did not show a significantly positive impact on revenue growth but instead higher usage from existing subscribers. This disappointed the market with the shares dropping 6.5%, the biggest drop related to its earnings releases since Q2 2019.
Production delays played its positive part on operating cash flows accelerating to $1.04bn in Q2 creating the largest free cash flow in Netflix’s history of $900mn up from a negative free cash flow of $1.6bn in Q4 2019. Analysts expect free cash flow to be $180mn this year and then go back into negative in FY21 raising the question whether Netflix will ever reach the profitability level needed to support the valuation which is almost 5x the global equity market on EV/EBITDA. Given the slowdown in content production we believe there is a real danger of Netflix disappointing the market tomorrow.