“It’s not sustainable,” Neil Begley, Moody’s senior vice president, told CNN Business.
“Strategically, Netflix is doing all the right things. But they’ve layered over that a level of financial risk that would make a lot of people uncomfortable,” Begley added.
Netflix expects cash burn to ‘improve’
Investors seem unfazed. Netflix shares dropped 3% on Thursday, but they remain up 26% in 2019 through the first 13 days of trade.
And why wouldn’t Netflix have confidence? It added a record 8.8 million paid subscribers during the fourth quarter, beating its own estimates. In total Netflix now has 139 million paying memberships, up from 110 million at the start of 2018. And the streaming company estimates it earns around 10% of television screen time in the United States.
Netflix signaled optimism on the cash burn front. While negative free cash flow will be “similar” this year to 2018, Netflix expects it to “improve each year thereafter” due to improving margins. Future investment will be funded more “internally,” Netflix said.
Moody’s agrees. Begley expects Netflix to break even on cash flows by about 2023.
Streaming arms race
For now, analysts credit Netflix’s hefty spending with sparking blockbuster growth, especially in international markets.
Goldman Sachs has found a strong correlation between how much Netflix spends on content and how fast it grows its subscriber base.
Given that Netflix plans to continue to ramp up content spending going forward, Goldman Sachs analyst Heath Terry wrote in a report on Friday that there could be “considerable upside” to how fast the company adds customers in 2019.
UBS analyst Eric Sheridan said Netflix’s latest results show the company has built a “widening moat” by building momentum on customer growth and finding blockbuster content success. He raised his price target on Netflix to $420, which is about 22% above current levels.
Leaning on debt
“All of this growth and investment in content has really been borne by bondholders,” said Begley. “And they plan to continue to do that.”
It’s been a winning strategy. Lured by Netflix’s speedy growth, the junk bond market has afforded Netflix generous terms to borrow heavily.
But that playbook could run into trouble if financial markets seize up, as they did at the end of last year. No US junk bonds were issued in December, the first such shutout of the junk bond market in a decade.
At a minimum, Netflix might have to accept higher borrowing costs during times of market stress.
The good news is that Netflix isn’t facing any imminent debt maturities. The company doesn’t have any debt due until February 2021, and even then it’s a manageable $500 million, according to Moody’s.
In the meantime, look for Netflix to continue to spend aggressively on content in a bid to pad its lead in the streaming wars.
Source : Nbcnewyork