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Netflix is burning through billions of dollars in cash to provide new content to its subscribers. The streaming giant has announced to investors that it is going to raise $2 billion through debt securities.
Netflix is streaming leader because of spending
Netflix announced in a statement to investors that it will use the money for ‘general corporate purposes, which may include content acquisitions, production and development, capital expenditures, investments, working capital and potential acquisitions and strategic transactions.'
The company is riding a wave of good will after having higher- than- expected third quarter (Q3) earnings. Netflix’s revenue was $4 billion, the company added seven million new subscribers, and shares rose 10% after its earnings report. Though Netflix has increased earnings, the company issued billions in junk bonds to get to that financial high point.
In Q3, Netflix reported spending $2 billion on content and a long-term debt of $8 billion in 2018. The company is spending billions to give subscribers nearly 1000 new shows for this year alone. The firm feels the debt will be worth the gain in new subscribers.
‘We recognise we are making huge cash investments in content, and we want to assure our investors that we have the same high confidence in the underlying economics as our cash investments in the past’, noted Netflix in a letter to investors. ‘These investments we see as very likely to help us to keep our revenue and operating profits growing for a very long time ahead.’
Netflix could face challenges that make debt a problem
While Netflix’s stock is strong, some investors are bullish on the company. They feel that the ongoing debt will eventually lead to more negative cash flow. Netflix currently has a negative Q3 free cash flow of $859 million the and the debt is expected to grow into the billions by 2019. Critics also say that the constant spending on content to add new subscribers isn't a sustainable business model.
Netflix could also face a challenge from Disney when it launches its streaming service next year. Bullish investors say that the company’s stock price could fall once Disney offers its popular animated movies and Marvel superhero blockbusters to streaming customers. Netflix hopes that it can spend its way to more growth before other streaming services get a chance to take away the company's viewers.