Netflix shares closed lower in the US Tuesday as the online streaming service announced it is offering $1.9 billion of junk bonds to help raise the funds it needs to creating some $8 billion of original content in 2018.
Netflix is confident its strategy to retain existing subscribers and attract new ones with the best quality original content, telling local stories from all around the world is the right one. However, investors seem a little less sure about the high cash burn rate of the popular FANG stock.
Netflix shares ended the US Tuesday session 3.66% lower at $307.02. The reverses much of the gains made by the stock in the wake of its Q1 earnings results release, last week.
Netflix bond offering
Netflix announced the news of its latest junk bond offering late Monday. The news the firm is raising a further $1.9 billion by issuing bonds for investors to purchase, follows comments in its Q1 earnings release outlining its intentions to raise additional funds.
“We have about $2.6 billion in cash and we will continue to raise debt as needed to fund our increase in original content,” Netflix said in its earnings press release.
“Our debt levels are quite modest as a percentage of our enterprise value, and we believe the debt is lower cost of capital compared to equity,” the streaming service added.
Netflix has made it clear that it plans to continue giving subscribers what they appear to like – original, local content and plenty of it.
And, while this strategy does appear to be working, the costs associated with such a strategy are pretty high. Hence the reason for a fifth major bond offering – Netflix’s largest ever - over a three-year period, for the business.
In addition, Netflix expects it will end 2018 with a negative free-cashflow of around $4 billion. That’s as the streaming service plans to spend up to $8 billion on original programming over the year.
The latest bond issue has brought some caution to investors as the stock has been the darling of the FANG group. However, so far, the company’s strategy has paid dividends – and there’s no real reason to expect that to change. For the moment, at least.