Netflix, Inc. (NASDAQ:NFLX) will take on $400 million in debt as it continues expanding into Europe and generating new content to compete with HBO, reports Ben Popper for The Verge. Netflix has recently surpassed HBO’s US subscription numbers, but is only now beginning to compete with its long-established rival internationally.
“At $900 million of total long-term debt, we will have an extremely modest debt-to-equity ratio,” said Netflix CEO Reed Hastings. Even if that’s true, deciding to nearly double down on debt, even at today’s favorable rates, could alarm investors.
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Morgan Stanley briefly downgraded Netflix, Inc. (NASDAQ:NFLX) to Underweight, before reconsidering and returning it to Equal-Weight three weeks later, but this shows how little confidence Morgan Stanley’s Scott Devitt has in the stock right now. The Street rates Netflix as a Buy, but only gives the stock a B- score.
Licensing issues could disrupt Netflix’s European expansion
As Netflix, Inc. (NASDAQ:NFLX) enters new markets, it not only has to deal with a new raft of local competitors, but it will face regulatory hurdles that HBO doesn’t have to deal with. Streaming services are treated differently than cable TV (e.g. in France, films can’t be streamed until they have been out of theaters for three years), putting Netflix at an immediate disadvantage in those markets. No doubt Netflix will lobby to review such laws, but it needs growing European subscriptions to offset slower subscription growth in the US if it’s going to hit EPS growth estimates.
$400 million buys 100 new episodes of original content
A string of original hits including House of Cards and Orange is the New Black was a major factor in driving both the company’s subscriptions and stock price last year, and a large portion of the $400 million will be used to create more original shows. A second season of House of Cards is coming soon, and there is talk of a third. TV literary agent Peter Micelli revealed that Netflix, Inc. (NASDAQ:NFLX) is spending about $4 million per episode for its original content, reports Andrew Wallenstein at Variety, so Netflix could pay for about 10 seasons worth of content with the money they’ve taken out.
But there are also rumors that Netflix, Inc. (NASDAQ:NFLX) may also try its hand at feature length films. Filming a two-hour film shouldn’t be more technically demanding or expensive than a ten-hour television series, but viewers have different expectations for movies. If Netflix can meet those expectations, it would go a long way to proving its claims to be the future of television.