Netflix (NFLX, Financial)’s business model relies upon earning membership fees globally by streaming video content to its subscribers. The company that started out as a DVD rental player now streams a mix of original content along with licensed content. In the last few years Netflix has been steadily chopping away at its licensed content library, while steadily adding more original content to its fold.
The advantage of that move is that the company will clearly be able to stand out from the crowd, and since it already has a solid membership base, Netflix is possibly the only video streaming company to have the bandwidth to throw billions of dollars into its original programming efforts. And we are already seeing the results of that.
The effect of Netflix library’s transformation can be clearly seen in its financial statements. While total revenues nearly doubled between 2011 and 2015, moving from $3.20 billion to $6.78 billion, long-term debt exploded more than 10 times, increasing from $195.12 million to hit $2.37 billion by the end of that period. It is burning cash at a fast rate because the race is now on to increase the lead over its up and coming rivals as much as it can.
Bloomberg reported earlier this year that Netflix will be spending $5 billion on original programming. That is nearly half a billion more than what Time Warner is planning to spend this year. So it was not exactly a surprise when Netflix announced its partnership with iPic Entertainment, a luxury theater chain operating in 15 markets across the U.S.
Though its real goal is to be a stand-out player in a slowly crowding video streaming market, Netflix needs to quickly find means other than debt to fund its original programming push. Customers won't be able to spend such a high amount for one year and and then reduce their spend the next year, especially not when they are in the movie business but even more so when you are selling subscriptions to customers all over the world.
Netflix’s debt profile is not way over the top for a company with a long International runway. At the end of the most recent quarter the company had $2.3 billion in long-term debt, with trailing 12-month revenues at $7.625 billion. But is clearly seen, debt is increasing at a fast rate, andthe trend might likely continue for a few more years.
As such, new revenue streams like the iPics deal will definitely help balance out Netflix's financial statements in the medium- to long-term, and it is exactly this type of thinking that will profitably push Netflix into its next phase of growth.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
