Netflix's New $2 Billion in Borrowing Raises Wall Street Eyebrows

The streamer's long-term debt has soared north of $10 billion, though Moody's says ratings and outlook remain stable.

Netflix's insatiable appetite for content, both original and licensed, is causing the giant streamer to borrow another $2 billion, and Wall Street has mixed emotions on the matter.

While Monday's disclosure of additional debt didn't immediately knock the stock down, several hours later shares had given back the day's gains and ended by trading down 1 percent.

Longtime skeptic Michael Pachter of Wedbush Securities says the additional debt did not come as a surprise, considering Netflix's penchant for reporting negative cash flow. "It is precisely what we modeled," says Pachter. "So long as they burn cash, they will have to raise capital to fund their content spending."

Netflix is a victim of its own success. Its original content streamed on demand has proved so popular it has attracted many copycats, so Netflix must spend wildly to keep up with relative upstarts like Amazon, CBS All Access, HBO Now and Hulu.

It also must replenish what it is gradually losing from Warner Bros. and Disney, as each of them prepare to launch their own services next year that will directly compete with Netflix. This means that if Netflix users want to stream episodes of Friends or the movie Coco, for example, they eventually won't have the option without signing up for yet-to-be named services from Warners and Disney, respectively.

"They're burning around $3 billion a year, so we should expect them to borrow around $3 billion a year for the foreseeable future," Pachter says of Netflix.

With the additional $2 billion, Netflix's long-term debt has soared north of $10 billion, though Moody's says ratings and outlook remain stable.

Netflix's spending on content is expected to be about $8 billion this year alone, though some speculate it could swell to $13 billion. The streamer boasts some 137 million subscribers, and it is depending on signing millions more globally to keep the rapid growth investors have grown accustomed to.

"Despite the continuing issuances of debt to fund the company's negative cash flows, we expect leverage to drop gradually over time as the transition from licensed content to produced original content levels off and newer international markets begin to contribute to profits and overall margins improve," says Neil Begley, an analyst with Moody's.

"The interest rate charged will reflect their perceived ability to repay, and until creditors refuse to lend to them, I expect the cash-burn and borrowing cycle to continue," adds Pachter.

Netflix bulls agree that more spending is in the cards; they just aren't overly concerned about it. The stock, after all, has nearly doubled in two years amid heavy borrowing and negative cash flow.

"Netflix is willing to invest heavily to be the global leader in entertainment for the next several decades. If you want to go to the moon, you have to burn a lot of fuel," says Ben Weiss, chief investment officer at 8th & Jackson Capital Management.