How Netflix's Weird Approach to Debt Helped it Change TV

TL;DR

Despite a growing debt load of over $10 billion, Netflix remains focused on long-term content investments, as reflected in their negative free cash flow projections for 2019.

Transcript

Dylan Lewis: Going back to their report for a minute, one of the things that we've watched with this company over time is, what does the debt load look like? I know that management has a slightly different philosophy about debt than maybe some of the other companies that a lot of people follow. It looks like we're going to see more debt coming onto... Read More

Key Insights

• 🧍 Netflix's debt load has been a long-standing concern for investors due to its continuous increase.
• 🥳 The company's debt to market cap ratio justification for debt has been criticized as unreliable.
• 👶 Changes in Netflix's capital allocation strategy under the new CFO may impact their approach to debt financing.
• 💪 Despite concerns about debt, Netflix's strong subscriber numbers and forecasts have kept analysts bullish.
• 👨‍💼 The focus on content investments as a long-term strategy indicates Netflix's confidence in their business model.
• 🥶 Debt load and negative free cash flow projections for 2019 highlight the challenges Netflix faces in balancing growth and financial stability.
• 👲 The volatility of Netflix's market cap makes debt to market cap ratio a less reliable measure for analyzing the company's financial health.

Questions & Answers

Q: How does Netflix justify its growing debt load?

Netflix justifies its growing debt load by pointing to their debt to market cap ratio, which many view as a misguided approach as market cap can be volatile while debt is a tangible financial obligation.

Q: Why do investors focus on debt relative to cash instead of market cap?

Debt relative to cash is a more reliable indicator of a company's ability to pay off its financial obligations, as cash is more stable compared to market cap or share price.

Q: What are the potential risks of using debt to market cap ratio to justify debt?

If a company's market cap drops significantly, the justification for the debt can become invalid, leading to uncertainty and potential issues in debt repayment.

Q: Could Netflix use alternative methods to raise capital instead of relying on debt?

While Netflix has mentioned their strategy of using debt as long as it has a lower after-tax cost than equity, they could also consider selling more stock through secondary offerings, which might have a higher cost of equity but no associated interest expense.

Summary & Key Takeaways

• Netflix's debt load has been steadily increasing, reaching over $10 billion, with $4 billion added in 2018 alone.

• The company expects negative free cash flow of $3 billion in 2019, reflecting their long-term investment in content.

• Netflix recently named a new CFO and it remains to be seen if this will lead to changes in their debt strategy.