Streaming companies are accruing more debt to sustain heavy investments in content, Axios' Sara Fischer writes. In addition, their leverage (debt to EBITDA ratio), is higher than it has been historically.
Why it matters: While most analysts agree that the debt loads at most of these companies are manageable for now, some firms are beginning to feel investor pressure to manage rising debt before it gets out of hand.
Driving the news: Under pressure from activist investor Elliott Management, AT&T said last week it will sell its wireless and wired assets in Puerto Rico and the U.S. Virgin Islands for about $2 billion to Liberty Latin America.
- AT&T said in the announcement that it would sell $6 billion to $8 billion worth of assets this year, but this deal puts the total at $11 billion.
AT&T is in a precarious position, argues Jonathan Chaplin, an analyst and managing partner of New Street Research.
- "AT&T has the lowest leverage of the four (Comcast, AT&T, Disney and Netflix), but they also don’t grow EBITDA."
For Comcast and Disney, the trajectory is much more optimistic. "Some companies can justify debt because they have defensible niches and stable cash flow," says Michael Pachter, a research analyst at Wedbush Securities.
Netflix, on the other hand, has seen its free cash flow dwindle this year. And as a result, its leverage is the highest compared to many of its streaming rivals and high compared to the industry average. (See chart above.)
- The company, which will spend roughly $15 billion on content this year, is the only company of its major streaming rivals that isn't profitable. It relies on the debt markets to fund its growth.
- "Ultimately, they are going to have to generate free cash flow to pay back their $12.6 billion of debt, and it looks to me like they will be close to $20 billion in debt before they get there," says Pachter.
What's next: Netflix is under increasing pressure to grow its user base if it ever hopes to offset is massive debt.
- Investors are looking for international subscriber growth when it reports earnings Wednesday to offset any threats from rival streaming services that are set to launch later this year and next.
- Its stock has taken a beating after the company reported weak Q3 user additions.
Bottom line: What Netflix has going for it is its businesses is "genuinely raising debt to face the shift in distribution models," argues Chaplin. That's a big reason investors remain bullish on the stock, despite the fact that it's burning tons of cash.
Go deeper: How Netflix burns $10 million a day