Over the last few years, one of the major topics in the streaming market has been whether or not Netflix can sustain its cash flow. Despite drawing in millions of subscribers worldwide and cranking out award-winning content, investors have always been wary of Netflix. For some time, the undisputed streaming leader has been spending and investing much more than it has been earning, generating a never ending stream of headlines wondering if Netflix’s strategy will pay off. That mystery just deepened as Netflix announced this week it will begin selling bonds in attempt to raise $2 billion for new content. How much longer can Netflix keep it up?
Netflix’s bond offering has earned a “junk” rating from Moody’s Investor’s Service, meaning while it may be high-yield, it’s also high-risk. Netflix, Inc. says the debt raised by these bonds will be used for “general corporate purposes,” mostly in the form of acquiring and producing new content. Despite the junk rating, though, Moody’s writes that Netflix “has the ability to reach cash flow break-even within five years” and provide returns on investment as high as 20%.
“We believe the company’s strategy to procure its own content has positive long-term implications as it builds its owned library assets as compared to pure licensing of content,” Moody’s writes. Netflix’s plan “will provide scale benefits for the company and increasingly provides proprietary value to consumers, not to mention provide a valuable asset base for investors. With distribution reaching across the entire world, Netflix has the capability to create content at a fixed cost and scale it across a near global footprint.”
For years now, Netflix has operated on a “spend first, earn later” strategy as it pours billions into new content with the ultimate goal of earning more subscribers. Several Netflix originals like Stranger Things and GLOW have led to huge subscriber boosts for the streaming service, and many of these newfound subscribers keep their accounts active in the anticipation of new big releases. Can Netflix keep the top-tier content coming long enough to turn profitable?
