Asia · Tokyo Wire
Netflix ( NFLX -4.67% ) just bought back its own stock like never before. The streaming giant repurchased a record $4.7 billion of shares in the second quarter, and it closed the quarter with $27.1 billion left on its buyback authorizations. That's a big figure, even for Netflix .
At about $76 per share as of this writing, the company's market cap is about $326 billion. Put another way, the unused authorization is enough to retire about 8% of the whole company at today's price. But a big buyback headline and a good result for shareholders are not the same thing.
What matters is how quickly the share count is shrinking, how long the pace can continue, and what shareholders get out of it. Image source: Netflix. The Warner Bros. breakup helped pay for it The authorization took shape quickly, and a deal that did not happen is a big piece of the story.
Netflix had been trying to acquire Warner Bros., but it chose not to increase its offer, and the deal fell through early this year. The breakup came with a $2.8 billion termination fee received by Netflix -- money that drove management's 2026 free cash flow forecast up to about $12.5 billion, from a prior $11 billion. Netflix had suspended its buyback during the pursuit, and it resumed in the first quarter, spending $1.3 billion and leaving $6.8 billion on its authorization.
In April, the board added another $25 billion to a repurchase program that doesn't have an expiration date. The company put the new room to work immediately. It spent $4.7 billion on its own shares in the second quarter, more than triple the previous quarter's outlay and its biggest quarter of repurchases to date.
Also worth mentioning: Netflix paid an average of about $88 per share for that stock. With the stock around $76 today, the same money retires more shares than it did a few months ago. Can Netflix keep buying at this pace?
Not at the second quarter's rate. Netflix brought in $1.5 billion of free cash flow (the cash its operations produce minus equipment purchases ) during the quarter, down from $2.3 billion a year earlier. The drop included larger cash tax payments linked partly to that termination fee.
So the quarter's buying was about three times the cash the business produced during it, with the difference coming out of the additional cash the Warner Bros. episode left behind. The record quarter, in my view, says more about that one-time fee than about a new normal. Management forecasts about $12.5 billion of free cash flow for the full year.
By comparison, the $27.1 billion in authorizations amounts to a little more than two years of the cash Netflix produces after paying for all its content. In the end, the authorization is less a promise of more record quarters than a long runway of consistent buying. The buying is showing up in the share count.
Netflix averaged about 4.26 billion fully diluted shares in the second quarter, down from 4.35 billion a year before, a drop of about 2%. Two percent might not seem like much. But a share count shrinking at that rate contributes about two points to per-share growth every year on top of whatever the business itself generates.
And if Netflix spends the entire $27.1 billion anywhere near today's price, the effect grows. About 8% fewer shares would mean about 9% higher earnings per share on the same profits. Premium Feature Moneyball Superscore 79 /100 Today's Change ( -4.67 %) $ -3.52 Current Price $ 71.79 The second quarter showed the effect.
Net income climbed about 9% year over year, while earnings per share rose 11%. The buyback explains the difference. Is a $27 billion buyback authorization a reason to buy the stock, then?
Not by itself. A buyback, of course, magnifies per-share results. It does not change the direction of the business.
And the direction is what concerns me. Netflix's revenue growth was 16% in the first quarter and 13% in the second, a slowdown that arguably matters more than any repurchase program -- and growth might cool a bit more from here. At about 20 times next year's expected earnings, the stock is priced for that growth rate to level off -- something the buyback has no bearing on.
I'm pleased to see Netflix returning cash at prices well under what it paid a few months ago. But I don't buy a stock for its buyback, and I'm not buying this one today.
Source: The Motley Fool
