About that #NFLX debt

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Immediately after releasing the financial results for Q3-2018  Netflix has announced and priced a new issue of $1.9B debt in senior notes – rated as junk bond – to finance new investments in content and other long-term assets such as the new production facility in Albuquerque.

It might look sensational adding up to the roughly $8B already on the balance  sheet, but Netflix’s capital structure is actually not too different from comparable companies such as Amazon: the Debt to Assets ratio, for example, is roughly .34 for both, and slightly higher than .30 for AAPL and .26 for DIS. The liquidity is actually much better than Amazon and also better than the industry: the Quick ratio, for example, which measures the company’s ability to meet its short-term obligations with its most liquid assets is 1.4 for NFLX vs .76 for AMZN. NFLX’ s Interest Coverage, which measures earnings compared to interest expenses, over the past 10 years ranges from 2.3 to about 49.4 and is currently at a not so safe but not too worrying either 4.45.

So are they burning cash? Yes, quite a lot: about $1.4B in the last 9 months (despite the debatable accelerated amortization).

But is this an operating issue? No, not at all. Cash on the Balance Sheet actually grew from 2.8 to $3B YTD, while revenue and net income are also growing steadily. Growth comes from the international markets whose value has now surpassed domestic.

Regarding its valuation, EV/EBITDA is 21x (vs 59x AMZN). And how about efficiency? More than $2M revenues per employee (vs $314k AMZN).

Profitability is also looking great with ROE (ttm) above 30% and higher than 89% of companies in its industry, and operating margin (ttm) above 10% (vs AMZN just slightly higher than 3% even though still way lower than the amazing 25% of DIS).

All in all, Netflix is doing just fine folks! Are these announcements part of a magisterially conducted PR strategy? Partially, yes because Netflix is as strong as its brand and part of its marketing strategy is to shock the public opinion and make the world (and the markets) believe they are doing the best they can to deliver – and now produce – the best content.

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For what concerns the entertainment industry and most of all the content creators, all that matters is that they will keep investing more than $3B in original content each trimester, in the “three major categories of content: licensed non-first-window content such as Shameless, licensed original first-window content such as Orange is the New Black (owned and developed by Lionsgate), and now owned original first-window content from the Netflix studio, such as Stranger Things”.

Nonetheless, they are still looking for the real competitors, but they are now being challenged by the major studios – Disney above all, from which they are progressively parting ways – and in Europe by Amazon and a handful of local operators as well as traditional players and trying to partner with them – e.g. Sky UK – rather than fight them and due to the new EU regulations which require OTT players to carry a minimum of local content.

But they are as relevant as it’s possible to be, in television as well as feature films, where they gave new life, for example, to The Irishman by Scorsese and now they are a stable presence also at some very important film festivals such as Venice. Watch next at the Oscars, where they could win in the foreign language category with Roma by Alfonso Cuarón, by general consensus of the critics one of this year’s best films.

Netflix valuation, a House of Cards?

Worldwide fans of Congressman Francis Underwood’s adventures are going nuts for the release of Season 3. Yet the market is not impressed: NFLX share price dropped by 1.68% on the same day.

In fact, analyst widely agree Netflix current valuation (Nasdaq: NFLX) depends heavily on its ability on creating quality original programming and marketing them effectively. The uncertainty on future strategy which causes high volatility and recently determined a fully recovered sharp 26.4% drop needs to be addressed more clearly.

Netflix said its 320 hours of original programming in 2015 actually cost less than most of its licensed content. “We try to make each project more efficient and effective than studio content we’d otherwise be licensing,” the company said in its fourth-quarter investor letter.

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For its part, Netflix has been transparent about its ramp-up in spending for original content that brought 45 Emmy, 10 Golden Globe and two Academy Award nominations and several wins in just two years. “We will continue to grow the percentage of our content spending dedicated to originals for the next several years,” the company said. Continue reading “Netflix valuation, a House of Cards?”

“Netflix rhymes with Wet Chicks” for Sandler, means an opportunity for all

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Any game changes and evolves, so players’ attitude, and laws and regulations need to evolve accordingly.

The primary game changer Netflix has just announced, right after declaring that the first day-and-date worldwide release of a blockbuster will happen soon, that they are going to produce and distribute as soon as 2015 four feature films starring Adam Sandler, therefore coining the term web film, which is a film meant specifically for online distribution. Continue reading ““Netflix rhymes with Wet Chicks” for Sandler, means an opportunity for all”

Day-and-date release, Bubble or Tiger?

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The Weinstein Company planning worldwide day-and-date release on Netflix and IMAX theaters of Crouching Tiger, Hidden Dragon sequel is nothing new to the industry practice.

The first noticeable (because of the combination of a high-profile director and the backing of maverick billionaires Todd Wagner and Mark Cuban) example of such strategy was in 2006 when Magnolia Pictures released the Steven Soderbergh’s movie Bubble simultaneously to theaters and cable television channel HDNet Movies, whereas four days after they released the DVD. Continue reading “Day-and-date release, Bubble or Tiger?”