From the outside looking in, it appears as if Netflix is absolutely killing it. From Orange is the New Black and House of Cards to Stranger Things and Fuller House, the streaming service has a collection of buzzy original series and revivals on top of its improving movie presence. As of right now, Netflix (NFLX) paces the entire streaming industry with a whopping 104 million worldwide subscribers, according to the company’s quarterly reports. But trouble may be brewing in paradise.
According to the LA Times, Netflix has accrued a long-term and short-term debt of $20.54 billion. Yes, that’s billion with a B. But investors don’t sound too worried, if the LA Times is to be believed.
The company is pouring money into expensive prestige projects and expects to spend at least $6 billion in content this year. Its net cash outflow this year is forecast to grow to as much as $2.5 billion, up from $1.7 billion last year. Reflecting its growth, Netflix recently moved its Southern California headquarters into a 14-story building in Hollywood.
So far, investors have expressed approval of Netflix’s spendthrift ways. They are betting that debt financing in the near term will create growth and yield big results down the road on the theory that you have to spend money to make money.
The outlet also notes that the company’s stock is up 50% in 2017 as Netflix and HBO topped this year’s Emmy nominations. In terms of eyeballs and headlines, the streaming service is trending up and up. However, there is some concern that an inevitable slowing in subscription growth will yield damaging results. For the time being, however, the company appears confident that it can maintain its spending structure while continuing to add new customers.
Via the LA Times:
“That’s a lot of capital up front, and then you get a payout over many years,” Chief Executive Reed Hastings said in a recent investor call. “The irony is the faster that we grow and the faster we grow the owned originals, the more drawn on free cash flow that we’ll be.”
As a result, Netflix said it expects “to be free-cash-flow negative for many years,” meaning it will continue bleeding cash for the foreseeable future.
UPDATE: A Netflix spokesperson has offered a correction to the LA Times‘ report.
“The LA Times story inaccurately calculated our debt as $20b by counting our streaming obligations (i.e. our content contracts with studios) of $15.7b as debt, which it isn’t. The correct number: we have total gross debt of $4.8b vs. our equity market value of about $75b…For more context, the $15.7b accounts for future content expenses that roll through the income statement over time. Other media companies have similar obligations. As a point of reference, Disney/ESPN has $49b in similar commitments for sports contracts.”
With The Handmaid’s Tale, rival Hulu scored its very first must-watch original series this year and has been snatching up attractive programming to expand its library. Meanwhile, broadcast and cable networks are busy trying to build up their own streaming services to compete with Netflix. While Netflix remains the most popular option with strong short-term growth projections, the rising competition makes the long-term picture a bit murkier.