Netflix Inc. is all grown up, even if the streaming market that it dominates is not.

After a strong year of growth in 2020, Netflix said it now expects free cash flow to break even in full-year 2021. As such — between the company's $8.2 billion cash balance, its undrawn credit facility and the prospect of positive cash flow in the near future — Netflix executives said the company no longer needs to raise external financing to fund its day-to-day operations, including its expensive content budget.

Analysts say this is a momentous change for the company, as it also opens the door for stock buybacks.

'Psychological impact'

"There are obviously ramifications from a shareholder point of view when you start talking about buybacks," Kagan analyst Seth Shafer said in an interview, adding, "There's a psychological impact in shaping the identity of a company." Kagan is a media research group within S&P Global Market Intelligence.

Using cash to return capital to shareholders through repurchases or dividends signals that Netflix is now able to prioritize shareholders alongside growth, Shafer noted. While Netflix has long been a mature company with a stable customer base and reliable earnings, it has run a deficit to fund its ballooning content spend. Since 2014, it has gone from carrying total debt under $1 billion to reporting $18.29 billion in outstanding debt at the end of 2020. While executives said it will maintain a level of gross debt on its balance sheet ranging from $10 billion to $15 billion, it will no longer depend on lenders to fund operations.

"It's always a good idea to return capital to shareholders if they generate more than they need," Wedbush Securities analyst Michael Pachter said in an interview. However, he expects the company will generate less than $1 billion in free cash flow after breaking even in 2021, so any return program would likely take a modest start. He predicted buybacks of only about 2 million shares each year.

Netflix had roughly 441.8 million shares outstanding as of Oct. 24, 2020, according to S&P Global Market Intelligence.

MoffettNathanson analyst Michael Nathanson, however, expects a more aggressive buyback program.

"If we simply assume $15 billion in gross debt and 2 months of revenue held in cash, we estimate that Netflix will have excess cash for buybacks of $23 billion (10% of their current equity value) over the next six years," Nathanson said in a note on the company's earnings. He based that forecast on $5 billion in annual cash generation by 2024.

Fewer options

The company would likely begin a repurchase program not with those outstanding common shares, but by closing its outstanding stock options, said Howard Silverblatt, senior index analyst with S&P Dow Jones Indices. While closing options does not directly return capital to shareholders, it does safeguard against dilution by preventing those options from adding to outstanding shares in the future.

Many technology companies use stock options as a primary compensation tool, especially at the management and executive level, Silverblatt said. Netflix is no exception. It granted over $2 million in stock options each year between 2017 and 2019, distributing $2.6 million in 2019 alone. It has also been steadily issuing common shares to raise equity, collecting over $235 million from stock issuances in 2020 alone. Between 2017 and 2020, the company's outstanding shares grew from 424.3 million to 441.8 million.

However, Silverblatt noted that Netflix only signaled its intent to repurchase shares eventually; the company did not announce a specific buyback program. It is likely that the company is forestalling any official announcement until the competitive pressures of the market are more clear and its cash flow more predictable, Silverblatt said.

Delivering on promises

That said, Netflix has been a uniquely transparent and reliable company with its disclosures, Shafer at Kagan said. "They're good at putting benchmarks out there and typically hitting them, at being open and honest about what's challenging. To me, that's part of the Netflix story and what investors are piling into," he said.

While competition is mounting and the streaming market is still underpenetrated around the globe, 2020 went a long way toward establishing the ecosystem as consumers were sheltering at home and expanding their digital entertainment horizons. And for a rapidly maturing market, Netflix is the most established and penetrated player, so its guidance on cash, debt and buybacks is likely fairly reliable, Shafer said.

"I think from a Netflix point of view, it's a growth market still, but we're not talking about investing in bitcoin," Shafer said. "It's pretty established where the industry is going and what we're talking about as far as market share."

Netflix reported record subscriber growth in 2020, up to 207.3 million members at the close of the year.

In fact, before conducting their Jan. 19 earnings webcast, Netflix's executive team tried to decide whether the stable cash position or hitting 200 million subscribers was the bigger news. It was a toss-up, CFO Spencer Neumann implied.

"Turning to this next chapter in terms of our free cash flow and the ability to self-fund our growth going forward ... we think that's a pretty big milestone for us," the CFO said.