Did Netflix chill too much?

How should we view Netflix’s long-term outlook? Budrul Chukrut/SOPA Images/LightRocket

Netflix recently announced a new $ 2 billion debt to invest into its content industry. On September 30, Netflix reported having debts of $ 12.43 billion, up from $ 10.36 billion at the end of last year. This is the eighth time in the last five years that Netflix has $ 1 billion or more in debt.

Debt to face competition

Netflix continues to spend billions on buying or producing rights to various software itself. It also needs funding to cover the content budget, which is expected to reach $ 15 billion in 2019.

Last week, when third-quarter results were announced, Netflix told investors it plans to raise more debts for the full year.

“With a rapidly growing revenue base and expanding operating margins, we will be able to fund more of our content spending internally, and as we move slowly towards free cash flow positively, our plan is to continue to use the high-yield market in the meantime,” the company said in a statement. To finance our investment needs. “

To date, Netflix has not paid any of the long-term debt it made. They’re paying $ 160.7 million in interest for the third quarter (3.1% of quarterly revenue), compared to 108.9 million (2.7% of revenue) in the same period of the past year.

For the third quarter of 2019, Netflix reported a 31% increase in revenue. The company highlighted the growth targets for local subscribers for the third quarter.

In addition to long-term debt, Netflix has billions of dollars in extra-budgetary content spending commitments. Most of those are due within the next three years.

As of September 30, 2019, the company had $ 19.1 billion in content commitments. This doesn’t include $ 10.8 billion “because it has not yet met the criteria for asset recognition.” According to Netflix, on average, it expects to cover more than 90% of the assets of licensed and original broadcast content within four years of the first availability of the service.

Risk of bankruptcy

Netflix’s biggest issue is that it spends more and more to get new subscribers. Yet, so far it’s not working to proportion of the budget spent. The percentage of money Netflix spends on content and marketing per subscriber rose from $ 308 per new subscriber in 2012 to $ 581 per new subscriber in 2019.

So is Netflix at risk of bankruptcy? In theory, yes, because so far it has not made any gains that can offset even a small part of its debts.

Netflix is in a difficult situation even before the start of the real competition with the next two platforms by Apple and Disney Plus coming up.

However, the platform has earned its place in popular culture. So, competitors will need to bring something special to convince users to switch to another service.

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