Start the conversation
Netflix Inc. (Nasdaq: NFLX), a stock we talk about frequently, recently completed a $1.4 billion euro-denominated bond sale. Not surprisingly, millions of investors think this is a good move because it's money that the company will (presumably) put towards new content development.
I'm not so sure that's the case. More to the point, I believe savvy investors would be wise to put Netflix on a very short leash at the moment for three reasons I'd like to talk about today.
The devil, as they say, really is in the details.
Netflix announced last month that it would be raising $1.1 billion in a euro-denominated bond sale as a means of funding new content and growth. Almost immediately, the company raised the tally to $1.4 billion because demand was so high.
That's not surprising considering that the notes would be sold to "qualified institutional buyers" outside America who are presumably just as income-starved as their U.S. peers, and that the paper carries a 3.625% coupon.
Millions of investors think this is a great idea based on nothing more complicated than the fact that the company's stock has jumped 22% year to date and 74% over the past year, versus only 4.77% and 15.9%, respectively, from the S&P 500 over the same time period.
To their way of thinking, the company is going to use the proceeds to create "original content," which in Wall Street speak means incredibly valuable proprietary programming.
Here's Where Things Start to Fall Apart
- This offering increases Netflix's debt load by 42% in a single shot and will require interest payments of $51 million a year give or take exchange rate fluctuations. Interestingly, both S&P and Moody's rate the offering as sub-investment grade – meaning "junk" in plain English – at a time when the company is burning through more than $1 billion in free-cash flow a year. The company has $1.07 billion in cash and investments on hand, according to MarketWatch, which means there's not a lot of "runway" here if there's a hiccup.
- Amazon.com Inc. (Nasdaq: AMZN) is catching up to Netflix like a juggernaut in the rearview mirror at a time when that company can sell Prime video for less money than Netflix can sell its premium content because of implicit support from profitable retail and web services (that Netflix doesn't have).
- Netflix's library has some great content, but much of it is plagued by "nothing to watch" stuff with a very short shelf life. That tells me Netflix is going to have to continue to seek funding to generate content even though it does very little to generate incremental revenue. It strikes me as being a lot like a rat on a treadmill.
- Netflix is increasingly the odd man out, meaning that it's independent. For years this has been a strength, but now it's a weakness. Amazon is teaming up with Apple Inc. (Nasdaq: AAPL), Facebook Inc. (Nasdaq: FB) wants to develop its own TV-like content, and Alphabet Inc. (Nasdaq: GOOG) is creating new YouTube content that, in turn, drives its online advertising business. And that's not even counting players like NBC Universal's Comcast Corp. (Nasdaq: CMCSA), Time Warner Inc. (NYSE: TWX), Hulu, and other streaming providers edging in.
- Unless Netflix lines up with a much bigger player capable of protecting margins, I think it's only a matter of time before the company's business model runs out of mojo because it's a one-trick pony. At that point, the game's over and the stock's price reacts accordingly.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.