Netflix Inc. (NFLX) recently announced that it will raise $400.0 million by issuing senior notes. The company expects to use the net proceeds to fund its international expansions as well as corporate expenditures. Last year, Netflix raised $500.0 million securities for similar purposes.
According to Bloomberg, Netflix issued 5.75% senior notes due 2024 that yield 313 basis points (bps) more than bonds with similar maturity dates. Most recently, Moody’s (MCO) raised Netflix’s credit rating outlook to positive (Ba3), citing strong operating performance and continuing subscriber growth.
We believe that the cash infusion will help Netflix pursue its global expansion policy. Although the company has ventured into Latin America and Europe (U.K., Ireland, Nordic countries and the Netherlands), it has immense growth opportunity in the uncharted areas of Western Europe.
We believe the strategy to expand internationally will be accretive for Netflix over the long term, as it significantly diversifies the risk of customer concentration in a particular region. At the end of 2013, Netflix had 10.93 international members and revenues jumped to $712.4 million from $287.5 million at the end of 2012.
However, the international streaming segment continued to report loss at the end of 2013. Although Netflix expects to add 1.60 million international subscribers and report revenues of $267.0 million, loss is projected to be $42.0 million in the first quarter of 2014.
We also believe that Netflix will use the net proceed to acquire original content in 2014. The company’s expanding content portfolio that includes original productions such as House of Cards, Hemlock Grove, Orange is the New Black and Lilyhammer, drove the subscriber base in 2013.
Total streaming subscriber base increased 11.08 million year over year to 44.35 million at the end of 2013. Netflix in collaboration with The Weinstein Company (TWC) will stream the drama series Marco Polo in late 2014. The company will also stream original shows such as Sense 8 (early 2015) and Narcos over the next couple of years.
We believe that the expanding content portfolio and launch in the new international markets will help it to counteract stiff competition from the likes of Amazon (AMZN) Prime, HBO, Hulu, Youtube, iTunes Video and BBC iPlayer. Netflix will also face competition from Verizon (VZ) and Sony that are gearing up to enter the streaming business.
Moreover, the increasing debt level remains a concern. Further, Netflix has $6.5 billion due for content streaming obligations, out of which $2.78 billion needs to be paid within the next 12 months. After that period, Netflix needs to pay $2.83 billion within a three-year time frame. Going forward, this huge impending payment obligation would remain an overhang on the stock.
Currently, Netflix has a Zacks Rank #2 (Buy).
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