Netflix, Inc. (NASDAQ:NFLX) shares are up 7 percent and still rising in midday trades after Moody’s Investors Service downgraded the company’s debt rating. According to Reuters, Moody’s cites the company’s shift from DVD rentals to streaming TV shows and movies over the Internet.
Moody’s said the downgrade shows the higher risk that’s involved in the shift of Netflix, Inc. (NASDAQ:NFLX)’s business model because the video streaming model requires a larger subscriber base than the DVD rental model did. In order for Netflix to be as profitable as it was in 2009, it needs at least 35 million subscribers for its streaming services—a significant increase from the number of DVD subscribers they had at that time. Also, Moody’s said the operating environment for streaming video content is increasingly competitive.
Moody’s downgraded Netflix, Inc. (NASDAQ:NFLX)’s corporate family rating from Ba2 to Ba3. It also downgraded the company’s probably of default from Ba1 to Ba2, but it also said that the company’s outlook is stable. Moody’s recognized that Netflix could slow down on the addition of new content and similar costs if it experiences a year of slow subscriber growth.
Netflix does have its share of streaming competitors, so it is important for the company to maintain services that are superior to its competitors. Moody’s said if Netflix continues to outspend its competitors on content and increase its exclusive content offerings, then it should be able to build a solid position within the streaming video market and continue being a leader in the industry. Netflix's recent deal with The Walt Disney Company (NYSE:DIS) is certainly a step in the right direction for building exclusive content.