Netflix (NFLX) plans to borrow more money to boost its cash reserve. The company’s cash reserve was $4.4 billion at the end of the third quarter. The amount was lower than the company’s cash reserve of $5.0 billion at the end of the second quarter. The company intends to raise $2.0 billion through bond sales to boost the cash reserve. Netflix will sell bonds to raise more cash for the second time this year. In April, the company raised $2.0 billion through a debt offering.
Netflix’s borrows more money
Netflix’s long-term debt was $12.4 billion at the end of the third quarter. Therefore, the company’s debt could jump over $14 billion with the latest bond offering.
The new bonds that the company intends to sell will come in two series. One series will be denominated in the US dollar, while the other will be denominated in the euro. Last month, the Fed and the ECB lowered interest rates. They paved the way for cheap loans in the US and Europe. The company said that the interest rate on its new bonds will be determined through negotiations with purchasers.
Funding content production
Netflix intends to use the proceeds from the latest bond sale to finance content production and other projects. Content is the company’s major cost driver. Netflix’s content costs rose to over $12 billion in 2018 from $8.9 billion in 2017. However, the company’s content costs could jump to $15 billion in 2019 and to $17.8 billion in 2020. As the content costs increase, the company usually turns to the debt market to raise more money.
Netflix’s content spending has been rising. The company has invested in more original productions, which are usually expensive. The content costs might increase more as the company works to produce or license more shows to replace outgoing content. For example, Walt Disney (DIS), Comcast (CMCSA), and AT&T (T) plan to withdraw some of their hit shows from Netflix.
Netflix expects tight competition
Netflix’s latest move will tap into the debt market to boost its cash reserve. Moving forward, the company expects more competition. Next month, Disney and Apple will introduce new subscription video services in the market to challenge Netflix for subscribers. Disney and Apple have priced their video services below what Netflix charges for its service. We think that the companies plan to try to take Netflix customers by undercutting the company on pricing.
However, Netflix thinks that customers will continue to subscribe to its video service since it has great content. The company is confident even though the competition plans to offer lower prices.