Netflix and loss aren’t words that appear together in many stories about the streaming giant. The platform is constantly buzzing in coverage online, has a string of hits on its fairly young roster of shows, and might be one of the only platforms to surprise people when a show is canceled. This practice is changing, of course, and there could be a good reason for it according to the LA Times. In their pursuit of more subscribers and quality original programming, the streamer has accrued a long-term and short-term debt that totals $20.54 billion. And while the company can tout “104 million subscribers worldwide,” they’re still hoping for more to keep the wheels turning and investors happy:
The company is pouring money into expensive prestige projects and expects to spend at least $6 billion in content this year. Its net cash outflow this year is forecast to grow to as much as $2.5 billion, up from $1.7 billion last year. Reflecting its growth, Netflix recently moved its Southern California headquarters into a 14-story building in Hollywood.
So far, investors have expressed approval of Netflix’s spendthrift ways. They are betting that debt financing in the near term will create growth and yield big results down the road on the theory that you have to spend money to make money.
The LA Times shows that the company’s stock is up 50% for the year, but that some experts feel that Netflix’s bubble could burst due to their inevitable stagnation in their growth. That’s not to say that it is on the horizon for Netflix or that the company is in trouble. It does mean that there is a risk that the clock could run out and the debt becomes heavier and heavier. The company doesn’t seem too worried at the moment, though, and is keeping positive about their future prospects:
“That’s a lot of capital up front, and then you get a payout over many years,” Chief Executive Reed Hastings said in a recent investor call. “The irony is the faster that we grow and the faster we grow the owned originals, the more drawn on free cash flow that we’ll be.”
As a result, Netflix said it expects “to be free-cash-flow negative for many years,” meaning it will continue bleeding cash for the foreseeable future.
Bleeding cash is a wild way to put it, but Netflix’s biggest issue isn’t the money it is spending on original programs. Luring subscribers to the service via interesting shows they can’t get anywhere else is great, but there are still plenty of people signing on to binge shows that aren’t part of the Netflix family. And even then, some of those shows are licensed according to the LA Times. The streamer doesn’t fully own Orange Is The New Black, House Of Cards, The Crown, or its offerings from Marvel, so it has to pay to license them. Also, as we’ve seen with several shows from major networks, the platform could start losing more pieces to deals that end or will see prices go up as networks build their own streaming services to try and compete. Not to mention that Hulu, one of Netflix’s main competitors, is owned by three of the major networks and already has exclusive deals on programming that was lost on Netflix.
It’s certainly not a new model and Netflix seems poised to grow while running with a hefty debt. The LA Times reports that the company’s long-term debt level was at half a billion dollars four years ago and “has more than doubled to $4.84 billion” in the past year. Some experts say the company’s stocks will need a reevaluation in the coming years and some of the numbers may be inflated, while executives say their competitors are running with similar debt levels. Almost a “nature of the beast” argument, which is true when looking at Amazon Prime and its programming.
But as the LA Times points out, Netflix doesn’t have a major commerce operation backing it up to create “ample free cash flow.” It also doesn’t show signs of slowing up, an admirable move to either reach for the stars or burn up after flying too close to the Sun. It’ll be interesting to watch where Netflix goes in the future and if they’ll be able to climb to the level they’ve set their goals for. It seems weird to think there could be a day where Netflix is in trouble, but it could happen.
Right now, they’re not too worried it seems.
(Via LA Times)