Netflix Gets Debt Ratings Upgrade on "Strong" Streaming Trends, Free Cash Flow

Netflix co-CEOs Ted Sarandos and Reed Hastings
Han Myung-Gu/WireImage

Netflix co-CEOs Ted Sarandos and Reed Hastings

"The company's financial policy and discipline will determine the path of further improvements in credit metrics," S&P analysts say as their credit outlook remains "positive."

Netflix scored a debt ratings upgrade from S&P Global Ratings on Tuesday, with its analysts citing "strong streaming video trends and free cash flow improvement."

The S&P said the credit ratings outlook on the streaming giant remains positive, meaning there could be further upgrades down the line from the new "BB+" rating, up from "BB" previously.

A week after Netflix's fourth-quarter and 2020 results, the analysts wrote that the firm, "with help from accelerating secular trends for streaming video services during the pandemic, beat our expectations for subscriber growth, margin improvement, and free cash flow generation."

Indeed, Netflix, led by co-CEOs Reed Hastings and Ted Sarandos, said it could roughly break even on free cash flow this year and then stay free cash flow-positive in the future. "We expect the company to maintain strong operating metrics for the next few years and generate sustained free operating cash flow (FOCF) potentially in 2021," the S&P team said. "We now forecast Netflix will be no worse than break-even FOCF in 2021 despite significantly increasing content spending as content production returns to normal levels."

The analysts also highlighted that the "secular shift toward streaming video accelerated heavily in 2020 as consumers spent more time at home and consumed increasing amounts of in-home entertainment." And while all streaming services benefitted from this, Netflix as the leader in the sector "saw an unprecedented shift forward in its operating trajectory."

S&P expects Netflix to "aggressively spend on content production in 2021, but its bigger reach will allow its free cash flow trends to remain solid.

"The company's financial policy and discipline will determine the path of further improvements in credit metrics," S&P concluded. "If Netflix continues to grow content costs at a high-single-digit to low-double-digit rate, we forecast FOCF will remain positive and grow longer term. However, if Netflix accelerates content investment spending because of more intense competition or to accelerate subscriber growth, the FOCF improvements could reverse. Just as importantly, what we expect Netflix will ultimately do with its FOCF will determine our credit ratings longer term."