NEW YORK (Reuters Breakingviews) - Financially speaking, Netflix has come to embody the title of one of its new hit shows: "Stranger Things." The video-streaming service blew past quarterly subscriber expectations, as it celebrated a decade of being online. After burning through still more cash, its share price soared to a new high. Apparently growth can come at almost any cost.
The $57 billion company led by Reed Hastings added 7.1 million new customers after many initially blanched at a price increase last year. Both in the United States and internationally, Netflix surpassed its own forecast, tallying nearly 94 million for the quarter ending Dec. 31.
It was 10 years ago that Hastings disrupted his own groundbreaking DVD mailing service by making the big bet that people would watch movies and TV shows using an internet connection instead. That first-mover advantage helped initiate the so-called cord-cutting and cord-never movements.
Netflix just reached another significant milestone, too. Four years ago is when it started investing billions of dollars to produce its own series like "The Crown" and "House of Cards." The original programming accounted for five of the top 10 most searched TV shows in the world, according to Google. It also has inspired Amazon and others to give chase.
The impressive expansion comes at a bigger and bigger price, however. Netflix generated negative free cash flow of $639 million in the fourth quarter, an increase from $506 million in the previous quarter and $276 million a year earlier. Netflix also is anticipating negative free cash flow of about $2 billion in 2017 compared to $1.7 billion last year.
What's more, it leaves the power of scale unclear. For the extra $2 billion in revenue that Netflix reaped between 2015 and 2016, it produced just $74 million of additional operating income. Even so, the company's stock took another one of its trademark jumps, vaulting 8 percent in after-hours trading following the results on Wednesday, and is now valued at more than 140 times earnings. It is the stuff of investment science fiction.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.