As Netflix Trumpets Stock Value, Debt Investors Want Cash Flow
(Bloomberg) -- Netflix Inc. is using its newly minted $100 billion market capitalization to tout a return to the junk-bond market, but debt investors may cast a skeptical eye on the online TV network.
“When will the company ever produce positive free cash flow?" Bloomberg Intelligence analyst Stephen Flynn said in an interview. "The challenge for a bondholder is your upside is not the same as it is for an equity holder.”
Netflix has tapped debt markets before to fund the production of TV shows and movies, and said Monday it would increase the budget for marketing of programs, as well as technology. It most recently sold $1.6 billion of bonds in its largest-ever dollar-denominated sale in October.
“We anticipate continuing to raise capital in the high-yield market,” Los Gatos, California-based Netflix said in a presentation Monday when it posted its fourth-quarter earnings. “High-yield has rarely seen an equity cushion so thick.”
Debt-to-market capitalization isn’t a widely followed measure, Flynn said, but for Netflix, it’s the one where it shines relative to its peers. At 6 percent, its ratio is significantly lower than those of higher-rated media companies such as Walt Disney Co. and Viacom Inc.
“If you’re in Netflix’s position, it’s something you should talk about,” Flynn said. “It’s the best way to position your credit profile.”
A representative from Netflix declined to comment.
The world’s largest online TV network reported its strongest year of subscriber growth to date, propelling its market capitalization in line with the likes of Goldman Sachs Group Inc. and Qualcomm Inc. Its shares jumped as much as 13 percent to $257.71 in New York.
Yet splurging on new shows comes at a cost. The company has said it will spend as much as $8 billion on programming this year, and disclosed Monday it will shell out another $2 billion for marketing. Long-term debt stood at $6.5 billion at year-end, while long-term content liabilities totaled $3.33 billion.
The stock surge prompted multiple equity analysts to raise their price targets on the stock, but the optimism wasn’t shared by all. Matthew Harrigan, an analyst at Buckingham Research Group, downgraded the stock to neutral from buy, saying he’s skeptical that the company can replicate its domestic success abroad, especially in Asia where the local competition is dense and Netflix lacks pricing power.
“You’ve got to step back and do a sanity check on this,” he said in an interview. “They’ve got a great product and are competing with other great media companies. But this isn’t like Amazon, where it has the opportunity to take over the world with AI and penetrate every retail category.”
Chief Financial Officer David Wells said on an earnings call late Monday that as the company continues to build its content, some of the factors influencing its working capital needs have started to moderate.
“As our operating profit grows, we’ll be able to pay more for that organically,” he said.
Content and subscriber growth are the roots to Netflix’s success, which is why it’s hard to see the company pulling back from that to help turn cash flow positive, said Rahim Shad, a high-yield analyst at Invesco Ltd.
“With Hulu and Amazon making their own strides in original content, you almost have to spend your way to remain relevant and successful at this game,” Shad said in an interview. The upside case for the bonds would be a takeover by an investment-grade company like Apple Inc., as Disney plans to acquire a majority of 21st Century Fox Inc. and Amazon.com Inc. is already developing its own content, he said.
Netflix also said it doesn’t expect the new limitation on interest deductibility in the recently passed U.S. tax law to affect its business. That aspect of the law has been seen to deal a blow to junk-rated companies, especially those rated B and lower. Netflix is rated B1 by Moody’s Investors Service and an equivalent B+ by S&P Global Ratings.
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