Netflix, Inc.’s (NFLX) $1B Debt Offering Is Absolutely Necessary

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Back in June, I explained that Netflix, Inc. (NASDAQ:NFLX), while lagging, was hardly a falling knife. This week, Netflix stock finally got some substantial upward momentum to prove that thesis. In fact, substantial is arguably a wild understatement.

Netflix, Inc.'s (NFLX) $1B Debt Offering Is Absolutely Necessary

Source: Via Netflix

Netflix stock jumped around 20% after its third-quarter earnings blew away expectations. The company’s per-share profit of 12 cents per share doubled the consensus, and that beat came thanks to strong sales.

The company’s global streaming revenue topped $2 billion for the first time, propelled by 36% year-over-year revenue growth.

Subscribers were strong too: While Wall Street expected 2 million net additions internationally and 310,000 domestically, Netflix instead delivered 3.2 million and 400,000, respectively.

Original Content Is Key for Netflix Stock

Earlier this year, many thought that company’s price hike would drive folks away. I reminded readers that we must think of Netflix as the next incarnation of HBO, where people are more than willing to pay a recurring subscription to access exclusive programming.

Indeed, Netflix credited content, including the runaway success of Stranger Things and the popularity of the second season of Narcos, for its strong results.

The fact that Netflix’s content is paying off so strongly makes me optimistic about the company’s recent decision to take on more debt. This week, Netflix announced it is raising $1 billion through a new debt offering. This brings the company’s overall debt load north of $3 billion. While I’m usually wary of such a hole, I strongly believe this debt represents a substantial and necessary investment for Netflix stock.

As Variety pointed out, Netflix’s debt announcement didn’t specifically mention content, but included standard language about using it “for general corporate purposes.” Yet, original content has been Netflix’s golden goose for some time. And Netflix has expressed that its long-term goal is for half of its content to be original by next year.

The success of Stranger Things — not just in terms of critical acclaim, but in the fact that such a warm reception actually translated to tangible profits — is a positive indicator of just how powerful content can be. As the company noted in its earnings release:

“This nostalgic, supernatural thriller proved to be the blockbuster of the summer and is the kind of broad appeal, cross demographic, and cross border sensation that we hope will distinguish Netflix original content. Stranger Things is also notable as it is produced and owned by Netflix, which provides us with more attractive economics and greater business and creative control.”

I don’t love betting on a company with negative cash flow and growing debt obligations, but the tough reality is that content — especially high-quality, cult-favorite content — doesn’t come cheap.

The good news is that Netflix has proven it knows how to create broadly appealing content and how to spin that into profits. With that said, a continued investment in content bodes well for the future of Netflix stock.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane Trader,Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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