Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Credit investors are supposed to be more level-headed than their equity counterparts. 

But when it comes to Netflix, bond buyers seem just as blinded by the company's dream of becoming an unstoppable entertainment behemoth. This is illustrated by investors' eagerness to buy $1 billion of Netflix bonds this week, demanding the smallest amount of yield ever for dollar-denominated debt from a U.S. company with such low ratings and long maturities.

Cheap Money
Netflix just sold $1 billion of bonds with much lower yields than comparably rated notes
Source: Bank of America Merrill Lynch index data, Bloomberg

While the company carries B tier ratings from S&P Global Ratings and Moody's, bond investors are basically putting it on par with borrowers that have BB grades. Not only that, but Netflix increased the offering's size from the original $800 million. On Tuesday, the day after the sale, prices on the bonds rose. 

Netflix investors gave a variety of reasons for such hallowed treatment. It's a big company relative to other junk-rated issuers. Corporate bonds are still broadly in demand, and equity traders are so excited about Netflix that they're providing a big cushion against losses.

Besides, Netflix is already a household name. It's using the bond proceeds to pay for developing more shows, and it's expanding its web streaming into nearly every country in the world. If Netflix's global domination strategy pans out, debt and equity investors will be rewarded for fueling the company's launch into a global media superpower. 

But none of those reasons eliminate the fact that this company is rapidly burning cash.

Cash Bonfire
Netflix's free cash flow has turned negative in the last two years as the company spends on new programming and international expansion
Source: Bloomberg


Let's put hopes and dreams aside and just dig into the reality of Netflix's balance sheet. The company's $1.2 billion in negative cash from operations over the last 12 months is the third worst out of nearly 500 U.S. consumer or technology firms with at least $500 million in annual revenue. When you're on the same list as Sears and SolarCity, that's not choice company.

Feel the Burn
Netflix bleeds more cash from operations than all but two U.S. consumer or technology companies
Source: Bloomberg

To be fair, Netflix also has far more revenue and growth than most of its cash-burning peers. But that bonfires isn't getting extinguished anytime soon. Michael Pachter, a stock analyst at Wedbush, said recently that he doesn't expect Netflix to post positive free cash flow for the rest of this decade.

Imagine if John F. Kennedy had stood before Congress in 1961 and declared: "I believe that this company should commit itself to achieving the goal, before this decade is out, of continuing to burn cash with no end in sight." Someone call the script doctor.

If Netflix can't gain enough subscribers around the world to pay for its programming costs -- well, it won't be pretty. 

For now, enthusiasm in the company has become a self-fulfilling prophecy, with stock traders providing enough of a floor for bond investors to step in and fork over their cash. At some point, though, Netflix will have to prove its mettle by generating something tangible -- i.e., profit -- and not just a great story. And by the time that happens, an entire generation of new entertainment technology may have overtaken it. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net