Spreads on high-yield bonds issued by streaming giant Netflix Inc. widened by more than 20 basis points late Tuesday, after the company’s first-quarter earnings showed it losing customers for the first time since it was in its infancy.
Even worse, after losing 200,000 subscribers in the first quarter, the company predicted it could lose 2 million more in the second quarter. The startling reversal of fortune has the company considering two things that were unthinkable in the past — adding an ad-supported lower-priced service and aggressively chasing people who share passwords.
Netflix has almost $15 billion in long-term debt, according to its letter to shareholders, taken on over the years to fund its expansion and pay for content acquisition and production.
The company’s most active bonds, the 4.875% notes that mature in June of 2030 saw spreads widen by 21 basis points (0.21 percentage points) to 176 basis points over comparable Treasurys late Tuesday, according to bond trading platform MarketAxess.
The 4.875% notes that mature in April of 2028 saw spreads widen by 26 basis points to 186 basis points over Treasurys.
The stock, meanwhile, slid 36% in early trading Wednesday, putting it on track for its steepest single-day percentage decline since it fell a record 40.9% on Oct. 15, 2004.
is also on track to see its market value fall below $100 billion for the first time since Jan. 22, 2018 if its losses hold through the close, according to Dow Jones Market Data. Netflix would be valued at $97.4 billion based on the share count disclosed in its January 10-K filing, though the market value could change when Netflix gives an updated share count in its first-quarter 10-Q. The company was valued at $154.8 billion as of Tuesday’s close, creating a stunning loss of more than $57 billion of market cap in a single day.
Netflix is a crossover credit, one that is rated as high-yield, also known as “junk,” by Moody’s but investment grade by S&P Global Ratings after an upgrade last October.
On Wednesday, S&P acknowledged that Netflix had underperformed its expectations for subscriber growth for the past two quarters.
“What appeared to be a slowdown in subscriber adds in 2021 after the height of the COVID-19 pandemic may have been the beginning of a new slower phase of subscriber growth,” the rating agency said in a statement.
However, while the numbers disappointed, S&P is sticking with its ‘BBB’ rating for now.
The rating, which is two notches above the high-yield threshold, “reflects the progress Netflix has made translating its scale and strong brand into a sustainably free cash flow generative business. This pivot to a more mature and cash generative business, coupled with its strong brand and global over-the-top (OTT) leadership, distinguish Netflix from most of its peers in the early stages of building scaled OTT services,” said the statement.
To be sure, Netflix had positive free cash flow in the first quarter. The company defines free cash flow as “net cash provided by (used in) operating activities less purchases of property and equipment and change in other assets. “The number was a positive $802 million for the quarter, after $692 million in the first quarter of 2021 and after a negative $569 million in the fourth quarter. The company said it expects to be free cash flow positive for the full year of 2022 and beyond.
A look back to Q4 earnings: Netflix stock heads for biggest slide in nearly a decade—’We see few catalysts’
The company also said it’s within the top end of its gross debt target range of $10 billion to $15 billion, and with cash of $6.0 billion, it’s net debt was $8.6 billion at quarter-end. Interest costs came to $187.6 million in the quarter.
S&P said it expects the company to continue to moderate growth in content spending and to support its own ability to generate cash flow. The ratings agency is expecting full-year free operating cash flow of $1 billion to $1.25 billion in 2022, climbing to $3.0 billion to $3.5 billion in 2023. That would create net leverage of about 1.5 times, which “compares favorably to that of investment-grade media peers.”
However, if the company shifts to a more aggressive strategy to revive subscriber growth involving higher content spending, S&P could re-evaluate its rating.