Netflix: Watch the bonds
April 20, 2022
No regular reader will doubt that I’ve never exactly over-indulged on the Netflix Cool-Aid, so the latest news isn’t a big surprise. Price rises in a cost-of-living crisis and plateaued content offerings (both quality and quantity), matched with inflation in production, were never going to be a good mix. Add in vociferous competition and the mix is toxic.
When will there be good news? Tricky one. Once again Netflix has trailed its coat about advertising, and forcing every device to pay. Both are likely to cost as many subs as they bring. And don’t address the fundamental problem of a very high-cost base in a business with a highly variable, market condition sensitive, revenue stream.
As I have said before, Netflix already has the scale of market share and branding to mean that it won’t disappear but it looks, everyday, like more of a consolidatee than an consolidator. The shares have taken a battering and when the bidders do come profits will not be what they could have been a few months ago (when the pandemic was making Netflix look better than it was). However, all but buyers at the top will still do OK.
The company, so far, seems resolute in its determination to stay independent. But its $15 billion of long-term debt holders may not share that aspiration. If a predator wants to take that route in, it is getting cheaper all the time: Spreads on its high-yield (junk) bonds widened over 20 basis points after the news came out on April 19th.
Moody’s classifies the debt as junk but S&P had upgraded it to investment last October, likely to heading the other way again now.