By all standards, Netflix is a household name, a brand known to the population around the world. Company strategy has pushed its streaming services to every corner of the globe. The model has been successful, and the stay-at-home days of the pandemic helped spur subscriptions.
The company recently announced 2021 results, and headlines splashed across the financial media about its praiseworthy 19% growth in revenues ($29.7 billion in total)--aided continually by pandemic-era demand for streaming services and the steady upbeat in subscriptions in global markets. (Subscriptions now exceed 220 million.)
Stock investors didn't celebrate too much, as its share price has slid down a roller coaster in recent weeks. But does that reflect investors' concerns about the Netflix momentum easing up, or did that reflect traders expressing a greater concern about equity valuations everywhere?
In many ways, Netflix once again is at a pivotal point, a junction. The revenue growth rate is its lowest reported in the past nine years, the lowest since it long ago veered away from DVDs in the mail and hammered out its streaming strategy.
The alarm among investors or debt analysts has not always been a slowdown in growth. The company generated $5 billion in earnings and enough cash flow to ease some of the concerns about its mounting debt. Netflix's story, at least among debt-holders and ratings agencies, had been its steady habit of tapping debt markets to support the development of new content. New content, subscribers know well, is necessary to feed the growth and at least maintain a tight grip on old subscribers.
New content (programs, movies, documentaries, etc.) helps it maintain the old accounts, but permits it to attract new subscribers in the U.S. and regions and cultures around the world. But new content must be financed. Over the past eight years, the company's financial managers funded over $25 billion in new content (production costs, talent and acquisition costs, etc.) mostly from long-term debt (now hovering about $15 billion).
It has shirked issuing new equity to accomplish the same. Contrast with Tesla--although in a different industry, which issued $20 billion in new stock in 2020 to support its aggressive strategy to construct the infrastructure and production lines to manufacture more electric vehicles. (Netflix doesn't pay a dividend and hasn't hinted at doing so yet.)
At Netflix for years, because there had been earnings, there has been operating cash flow, but not enough to support all of its new-content goals. And after the stock markets helped spark a surge in its share price, the company has been reluctant to issue new equity to support such growth--the better to not dilute share value.
Furthermore, during a near-euphoria period of low interest rates and enthusiastic debt markets, the company had little trouble finding willing institutions, investors and banks to provide funds. Ratings agencies assigned non-investment-grade ratings to Netflix bonds, but investors snapped up the issues and traded them as if they were investment-grade.
Over the past two years, the steady increase in earnings (and operating cash flow) has permitted the company to slow down adding more debt. The boost in cash flows led one rating agency to upgrade the company to a BBB rating in 2021.
Netflix is now producing new content at a rate of at least $5 billion annually, an amount it likely has determined is necessary to keep subscriptions growing. By 2021, the company announced and then proved it could fund much of the new development mostly from operating cash flow.
Yet debt still has to be managed, refinanced, or paid down. There is still the $15 billion it must address, when some of that matures in years to come. The company will likely seek to refinance whatever might be due during that time.
Debt levels are often measured by the common Debt/EBITDA ratio--which has fallen from above 7.0 down to about 2.4 today. EBITDA, a performan metric based on pre-tax earnings, doesn't account for cash required to support new content. After accounting for new-content expenditures, there isn't much cash remaining (even in 2021) to pay down debt. Hence, the company will continue to rely on debt markets refinancing whatever is due in upcoming years.
The biggest worry--a concern expressed by stock markets the past month--is whether it revenue growth rate can reach what it experienced the past eight years (an average 27%/year)--especially as every other entertainment enterprise under sun has entered the streaming industry. They have offered every attraction or pricing discount to streer subscribers away from Netflix. The wars began a few years ago, but haven't peaked.
Its business model comes down to subscription memberships, retentions and additions. Sounds simple, but many of its strategies, financial planning, and growth prospects revolve around that basic mission: How does Netflix gain subscriptions, keep them, and grow them?On the other hand, as interest rates creep upwards, company finance managers may consider reducing some debt to manage interest payments--which topped $750 million last year and could rise even more as rates rise.
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