A Look at the Cost of Netflix’s Ambitions
For Netflix (NFLX) to continue growing subscribers and revenues, it must continue spending, at least for many years to come. A lot of the company’s spending is going into content acquisition. Marketing activities are also consuming a considerable amount. Netflix said earlier this year that it would invest over $1.0 billion in marketing this year. The company is also spending $6.0 billion in content acquisitions.
As it faces competition from Hulu, Amazon (AMZN), Sony (SNE), Apple (AAPL), and Alphabet’s (GOOGL) Google for online video subscribers, Netflix is looking for ways to differentiate its service. Therefore, in its content acquisition, Netflix is leaning more toward original programming to offer customers unique shows and movies.
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Spending spree contributing growth
Netflix says its spending spree has been serving it well. It’s acquiring more subscribers, and those subscribers are bringing more revenue. In 2Q17, for instance, Netflix added 5.2 million subscribers, and its revenue rose 32.2% to nearly $2.8 billion. The company beat expectations on both customer and revenue growth.
But the growth came at a cost. Netflix sank to negative free cash flows of $608 million, implying a steeper financial shortfall considering that negative free cash flow in the prior quarter was $423 million.
Netflix expects to remain in the negative free cash flow territory for many years to come. To begin with, it expects to finish this year with negative free cash flow in the range of $2 billion to $2.5 billion.
Why Netflix’s debt is no cause for alarm
As Netflix spends more than it earns, it has resorted to borrowing to plug the gaps. The company was carrying nearly $5.0 billion in debt at the end of 2Q17, an amount that has been rising steadily in recent times.
However, Netflix’s debt load is not a cause for alarm because its debt-to-market-cap ratio is lower than most of its industry peers, which simply means that Netflix’s balance sheet is not overleveraged.