Netflix Bonds Backed by Whim of Creativity
Netflix Inc. is selling bonds again, which should not come as a surprise. The internet subscription service has few other options to pay the estimated $11.5 billion bill next year for its streaming entertainment programming. The company doesn't make money; it's burning through cash and doesn't expect to break even for a long time.
But what is surprising is that debt investors are so willing to jump on board. They're financing a company that needs one hit show after another in a notoriously fickle industry to thrive into the next decade. And bond buyers are accepting materially lower yields on Netflix debt than comparably rated borrowers.
Netflix said on Monday that it planned to sell $1.6 billion more debt, with proceeds going toward "general corporate purposes." Bloomberg Intelligence analyst Stephen Flynn estimates Netflix may sell up to $1.4 billion in additional bonds over the next 12 months. Netflix has been clear that it will continue to sell debt so it can keep pouring money into new shows, with its programming expenditures growing a shade faster than revenue in the last couple of years.
The hope is that Netflix will become home to must-watch shows that draw in tens of millions of new subscribers around the world. Netflix continues to add customers rapidly, and it has defied long-standing expectations that its appeal will fade.
Still, it's far from certain that Netflix can keep up its track record of subscriber growth and savvy entertainment choices. Every month, the company will need to give subscribers reasons to keep paying their Netflix bills at a time of escalating competition. Every entertainment company is trying to become more like Netflix as viewers gravitate to web-streaming entertainment.
Yet investors don't seem worried that Netflix can pull this off. In fact, they can't seem to get enough of the company's bonds. Netflix has roughly doubled its long-term debt since 2014, to about $5 billion.
It's important to realize that this company's entire business model relies on a very compliant debt market. Understandably, stock investors like the Netflix strategy because the more the company borrows, the more upside they have. But bond investors are taking on more and more risk without that same upside.
In fairness, this is a hard time for investors to truly assess risk. Almost all markets look historically expensive on the heels of central bank policies that have suppressed borrowing costs for years. But Netflix is uniquely worrisome. It's another example of how bond investors are assuming big equity-like risks without the potential upside.
Investors will inevitably snap up Netflix's latest bond sale and the others likely to follow with gusto. But they should pause to consider whether the company's reliance on a hit-factory business model merits such enthusiasm.
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Daniel Niemi at firstname.lastname@example.org