Netflix’s risk from rising interest rates is just a 'rounding error'

  • Netflix‘s borrowing costs could rise as the Federal Reserve hikes interest rates.
  • The company funds a large portion of its content spend by borrowing money.
  • But this isn’t a real risk because the added interest expense would be immaterial, according to analyst Craig Huber of Huber Research Partners.
  • Watch Netflix trade in real time here.

Netflix investors haven’t had much to worry about recently as shares have more than doubled this year. Still, the potential for rising borrowing costs is a worry for some of the sharpest minds on Wall Street as the Federal Reserve is planning two more interest-rate hikes this year, and several more after that.

But the analyst Craig Huber of Huber Research Partners disagrees. He told Business Insider those who were worried about higher interest rates were “just nitpicky to find a negative data point.”

“Netflix has $US8.5 billion in total debt currently where the interest rates are locked in to 2021 to 2028,” he said in an email, adding: “However if the company added another, say, $US2.0 billion in debt over the next year and interest rates were 1% higher than otherwise would be the case, that estimated 1% higher interest rate adds only an incremental $US20 million in extra interest costs. Netflix is a company that should have $US2.0+ billion in EBITDA this year so $US20 million in higher interest expense on new debt due to higher rates is a rounding error.”

Netflix finances a large portion of its content spend with debt. In April, Netflix raised $US1.5 billion at an interest rate of 5.875%. The streaming giant said it will spend around $US14 billion in total for 2018, mostly on original content.

And while things are OK for now, some on Wall Street are warning about the impact of rising interest rates.

“The company’s need to issue debt to fund cash content obligations is a risk, particularly to the extent rising interest rates or the company’s financial state make taking on incremental debt at an attractive cost structure unfeasible,” Goldman Sachs analyst Heath Terry wrote in a note out to cliemts on mid-June. “In our model, we assume the company adds ~$US8bn in incremental debt to fund future content purchases, in addition to its recent $US1.9bn issuance, before organically driving growth in cash by 2022.”

And Barclays is also skittish about the impact of rising interest rates on the streaming giant. “Netflix’s ability to raise debt at investment grade rates despite burning $US3Bn+ in cash in 2018 is a function of rates,” analyst Ross Sandler wrote in a recent note out to clients. “The turning of the credit cycle could be more disruptive to Netflix than usual assuming it doesn’t turn cash flow positive in the next 2-3 years.”

Netflix reports its second-quarter results on Monday, July 16. Wall Street analysts surveyed by Bloomberg are looking for earnings of $US0.79 a share on revenue of $US3.938 billion.

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