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.
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.
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.
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.
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