Updated from 8:39 a.m. to include analyst comments in the eleventh paragraph.
For Netflix (NFLX) , it's been largely about one thing and one thing only -- subscribers. Yet, as the broader equity markets turn, cash may instead become king.
As Netflix continues to spend on originals, as well as deals with other content producers, its costs have skyrocketed. As of the end of the third quarter, its content obligations totaled $10.4 billion, up from $8.9 billion in the third quarter of 2014.
Sources familiar with the company's mindset believe the content commitments are an advantage for the company, as they keep subscribers locked in, but investors may begin to worry Netflix can't pay back its obligations if the economy and markets continue to get worse.
When Netflix reported third quarter results in October, the company slightly missed expectations, citing involuntary cancellations by customers upgrading to credit cards with chips. But investors largely gave Netflix a pass, as it managed to add 3.62 million subscribers, including 880,000 in the U.S. and 2.74 million around the world. The company earned 7 cents a share on $1.74 billion in revenue, compared to the 7 cents and $1.75 billion in revenue analysts had been expecting.
The company raised prices by $1 per month in October for new users in Latin America, Canada and the U.S. which may help free cash flow a bit, but Wedbush Securities analyst Michael Pachter believes any additional revenue will be eaten up by spending.
"We expect Netflix EPS for 2016 to be roughly flat with 2015, notwithstanding a revenue windfall from higher pricing of approximately $500 million next year (from price increases to $9.99 from $7.99 on old customers in May)," Pachter wrote in a note to clients. "We believe Netflix's shift to owned originals and higher licensed content spending drove the increase."
Pachter has consistently been one of the most bearish analysts on Wall Street, rating the company underperform with a $40 price target, compared to a current share price of around $100.
Free cash worsened throughout 2015, as the company ramped up not only content spending, but international expansion plans, adding markets such as Japan and others. In the third quarter of 2015, Netflix saw free cash flow decline by $252 million, compared to decline of $74 million in the third quarter of 2014. Since the beginning of 2015, Netflix's free cash flow has declined by $644 million, with seemingly no signs of slowing down.
The company, however, thinks it should be measured solely on subscribers, and makes no bones about telling Wall Street that.
"Look at our subscriber growth," Chief Content Officer Ted Sarandos said at a December UBS investor conference, when asked how to measure success. "Obviously, [customers] stick with it [Netflix] because of the ease of use and amazing user interface, and when you push play, it just works everywhere in the world. They are attracted to that programming."
Even though there may be some focus on profitability, UBS analyst Doug Mitchelson still believes it's all about the subscribers.
"While spotty U.S. tracking has been much of the focus recently, we continue to believe international trends are significantly more important for the ultimate success of Netflix (if NFLX wins int'l, we believe it will win globally, including in the U.S.)," the analyst wrote in a note to clients. Mitchelson rates shares buy with a $147 price target.
Analysts surveyed by Thomson Reuters expect the company to earn 2 cents a share on $1.825 billion in revenue when it reports results on Tuesday after the close.
At the end of the third quarter, Netflix had 69.2 million subscribers around the world, of which 66 million are paid; it has nearly 24 million paid subscribers internationally.
The company continues to invest heavily in original content, with Sarandos mentioning the company will have 31 original series next year, as it focuses less on buying older content from competitors.