Why Netflix Needs More Money (Again)

Reed Hastings 2 - 2016 Consumer Electronics Show in Las Vegas - Getty - H 2017
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The streamer is intending to spend up to $8 billion this year on content and already has racked up $6.5 billion in debt.

Netflix is still burning lots of cash to create and acquire content, so it is borrowing another $1.5 billion by way of issuing high-yield (better known as "junk") bonds. Monday's disclosure comes just five months since the worldwide leader in subscription streaming issued $1.6 billion in bonds.

Netflix's thirst for cash is directly related to content costs as the company ramps up production of original movies and shows like Stranger Things and 13 Reasons Why, two of the most popular series on television.

Netflix is intending to spend up to $8 billion this year on content and already has racked up $6.5 billion in debt, while its cash on hand is just $2.6 billion. Stifel analyst Scott Devitt projects Netflix borrowing more, so that by 2020 it will owe about $14.5 billion. He also figures Netflix's cash burn next year alone will amount to $3 billion.

While investors didn't seem pleased with Monday's disclosure of more junk bonds (the stock sunk 3 percent), Wall Street mostly appears to be unconcerned with the mounting debt, as the stock is up 66 percent so far this year.

Netflix has already acknowledged it could burn cash for the "next several years," even after raising its prices so that it is around $10.99 monthly domestically and $9 a month internationally. The streamer, though, needs to raise its fee to an average of $15 per user per month before it breaks even on cash flow, says Wedbush analyst Michael Pachter.

The company is spending wildly in the face of competition from Hulu, CBS All Access, Amazon Prime and others, including an upcoming service from Disney, so it can't afford to get complacent on its content offerings, goes the thinking.

Netflix leads the industry with 125 million subscribers worldwide, with Amazon in second place with 100 million, though the latter's service isn't strictly about on-demand video, as its product also includes free delivery for items purchased at the giant online retailer.

Netflix has 56.7 million subscribers in the U.S., and KeyBanc figures it can get to 80 million in the next decade, but the service is really counting on foreign countries for the bulk of its growth. Internationally, it currently has 68.3 million subscribers, and KeyBanc says that Netflix can hit 250 million worldwide in 10 years.

Pachter, though, is less bullish, and he predicts slower growth amid several more price increases until reaching $20 per month, then topping out at 200 million subscribers worldwide. At that point — roughly eight years from now — it would generate $600 million per month in free cash flow, or about $7.2 billion annually.

"If we're right, Netflix could be an exceptionally valuable company," says Pachter. "However, its growth profile at $20 per month is significantly different from its growth profile at an average of $10 per month."

Pachter also notes that Netflix can ill afford more experiences like it had with Baz Luhrmann's show The Get Down, where costs ballooned to an estimated $14 million an episode ($6 million is considered expensive) before the show was canceled after production began on a second season. The analyst expected Netflix to take a write-down of $30 million over that episode, though the company did not. 

"This reflects an unsustainable pace of cost escalation and an unsustainable method of content purchasing," said Pachter.

Netflix recently struck content deals with Ryan Murphy, Shonda Rhimes, Shawn Levy and Jenji Kohan, and CEO Reed Hastings acknowledged on April 16 in a letter to shareholders that they each represent "a substantial investment for us," adding that "they allow us to work directly with prolific and talented creators with a proven track record."

Hastings said that same day that Netflix generated $3.6 billion in streaming revenue in its first quarter, and added, "Our job is to spend this money wisely to increase our members' delight."