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Will Netflix Ever Raise Debt Again?

By Anders Bylund - Jul 18, 2020 at 8:27AM

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The company may have taken its last trip to the debt-powered cash well.

Netflix (NFLX 2.96%) reported second-quarter earnings this Thursday evening. The video-streaming veteran crushed subscriber-addition forecasts with the caveat that the next couple of quarters will be slower. Revenues rose 25% year over year to $6.15 billion, and earnings fell short of analyst expectations due to some currency-exchange adjustments and a large tax bill. No big surprises here.

Buried near the end of Netflix's management comments, you'll find a detail with game-changing implications. Netflix might be all done with raising debt to finance its operations.

A couple of remote controls resting on a few dollar bills.

Image source: Getty Images.

The usual process

Dipping into the debt market has been a recurring theme for Netflix over the last five years. The company held $2.4 billion of long-term debt papers in the summer of 2015. Today, the balance has multiplied many times over to land at $15.3 billion.

I would normally expect the earnings reports in the spring and fall to say something to the effect of, "Netflix will probably grab some more debt soon in order to finance its ambitious content production slate." A couple of weeks later, the company would follow through on that promise. That's how this stairstepped debt chart was created:

NFLX Total Long Term Debt (Quarterly) Chart

NFLX Total Long Term Debt (Quarterly) data by YCharts.

It's different this time

Here's the juicy bit from the earnings report:

With our [$7.2 billion] cash balance, $750 million credit facility (which remains undrawn) and improving FCF [free cash flow] profile, we have sufficient liquidity to fund our operations for over 12 months. As a result, we don't expect to access the debt markets for the remainder of 2020 and we believe our need for external financing is diminishing. (emphasis mine)

"Diminishing" is not the same thing as an end to the practice of borrowing more money, but you have to consider this statement in the context of Netflix's long-term goals. A few paragraphs earlier, the company took a deeper look at the improving free cash flow profile that includes positive cash flows for the full fiscal year 2020 and a 2021 reading that should look "materially better" than the peak cash burn of 2019.

The company has nearly $8 billion of cash equivalents and undrawn credit available, and Netflix may start to earn positive cash profits before that stockpile runs low. In other words, Netflix may very well be through with the whole debt-raising idea.

Netflix shares fell more than 7% on Friday as some investors pocketed profits from a recent run-up and others were spooked by the modest growth expectations for the second half of 2020. Honestly, the stock deserved to rise, thanks to another solid quarterly performance, honest near-term guidance, and the pivot away from debt financing I've been talking about here. Consider buying Netflix on this generous dip.

Anders Bylund owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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