Goldman Sachs says Netflix is about to stop burning through cash

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Reed HastingsReuters/Mike Blake

  • Netflix could stop burning cash in the near future, according to Goldman Sachs analyst Heath Terry.
  • He says Netflix's big content spend is set to pay off, especially in international markets.
  • Terry lifted his price target to $490 a share, roughly 30% above Netflix's current level.
  • Watch Netflix trade in real time here.

Netflix's light at the end of the tunnel may finally be emerging.

While Netflix has turned in two profitable quarters this year, its content spend is expected to hit $8 billion for 2018, making it cash flow negative for the year. But investors seem to ber confident in the streaming giant's ability to turn free-cash-flow positive, and they already seem to be pricing that in as the stock's price-to-earnings ratio sits at 238.

Goldman Sachs analyst Heath Terry agrees, he says positive cash flow is just around the corner - he raised his price target to $490 a share, roughly 30% above current levels.

"2018 will be the peak negative free cash flow year for Netflix, with revenue growth beginning to outpace content spend growth next year," Terry wrote in a note sent out to clients on Wednesday. He expects 2022 to be an "inflection" point, which will see the company hit the $500 million free cash flow mark.

Netflix's big content spend has been a sound investment, enabling it to continue to capture more subscribers and therefore more revenue, Terry said.

Terry expects Netflix to spend $14 billion on content this year. And while the company has highlighted an $8 billion figure for content spending, Terry says that only refers to the amortization of library content and that the total number is $14 billion, found on the Netflix's cash flow statement.

"Cash spend correlates strongly with future subscriber growth," he said. "The company's streaming content additions on the cash flow statement are highly correlated on a 12 month lagging basis with forward subscriber additions."

Simply put, when Netflix invests in new content today, it nets a bunch of new subscribers tomorrow. "This level of spend drives correlation-implied net subscriber adds of 34mn in 2019 vs. our estimate of 32.5mn and consensus of 26mn," he wrote.

Most of those new subscribers will likely come from markets outside the US. Back in February, Huber Research Partners' Craig Huber told Business Insider there is "a lot of room to grow the volume of Netflix users outside the US."

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While Netflix shares are trading at record highs, and many investors and analysts have big expectations for the movie-streaming giant, not everyone is on board with the idea that Netflix is on the right path. Wedbush analyst Michael Pachter, who is one of the biggest Netflix bears on Wall Street, told Business Insider the company is "not investing prudently."

"I'm concerned that their reported net income doesn't accurately reflect their economic situation," he said. "Cash burn matters."

Netflix is up a whopping 89.2% this year.

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