If It’s Netflix, Rising Debt Is Tolerable
Netflix stock sees gains on top of gains
Netflix stock (NFLX) shot up nearly 14% on the first full trading day following the release of the company’s 2Q17 earnings results. The rise in the stock came on top of more than a 30% gain the stock had accumulated since the beginning of the year and more than a 13% gain since the company’s previous quarterly report in April.
Make no mistake: the market isn’t rewarding every media company out there. Netflix’s case is an exception in many ways. Netflix stock gains following its 2Q17 report were driven by the fact that the company delivered pleasant surprises in the quarter.
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Netflix adds 5.2 million subscribers
The company added 5.2 million new customers, exceeding expectations that it would add just a little over 3.2 million subscribers during 2Q17. At the end of the day, Netflix crossed the 100 million subscriber milestone as shown in the chart above.
Netflix’s revenue of $2.8 billion in 2Q17 rose more than 32% from a year earlier and outpaced the consensus estimate of $2.8 billion.
Cash burn and rising debt
But Netflix continues to burn cash, and its debts are piling up. The company reported negative free cash flow of $608 million, up from $254 million a year ago. More cash burn is expected in the coming quarters. Meanwhile, Netflix’s debts are growing too. The company finished 2Q17 with more than $4.8 billion in total debt, up more than $3.4 billion in the prior quarter.
In the strategy of foregoing short-term gains for long-term growth and profitability, Netflix and Amazon (AMZN) are close relatives. Amazon is investing to stay ahead of competitors like Walmart (WMT), eBay (EBAY), and Microsoft (MSFT) in the retail and cloud computing industries.