Netflix: Viewers surge but so does the debt

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Netflix; an American entertainment company founded by Reed Hastings and Marc Randolph, specializes in and provides streaming media and video-on-demand online and DVD by mail. In 2013, Netflix expanded into film and television production, as well as online distribution. It entered the content-production industry in 2013, debuting its first series, House of Cards.

It has greatly expanded the production of both film and television series since then, offering Netflix Original content through its online library of films and television. Releasing an estimated 126 original series or films in 2016, it became the first network/cable channel to do so in the broadcasting history.

However, despite the outwardly glamour the firm is under heaps of debts, in the insistent hunt of more viewers. Though the burden Netflix is carrying hasn’t been a cause of concern for the Wall Street, so far since CEO Reed Hastings’ strategy has been recompensing off.

As of October 2017, Netflix had 109.25 million subscribers worldwide, including 52.77 million in the United States. Their efforts to produce new content, secure the rights for additional content, and diversify through 190 countries, has resulted in the company racking up billions in debt: $21.9 billion as of September, 2017, up from $16.8 billion from the same time the previous year.

The bigger bucks the company has borrowed to pay for the exclusive series such as “Stranger Things” and “House of Cards” has greatly boosted the audience numbers in the past four years. So much so that it rounded up to 109 million subscribers worldwide through September.

This exuberant growth exceeded management forecasts and analyst projections. The firm’s stock increased 2% in extended trading, putting it on track to touch new highs Tuesday. And what’s more astounding is that the shares have increased by about five-fold during the past four years!

However, if continued on like this the company would have to pay bigger costs or be simply trampled by the stock piling debts. For this viewer surge could very well slow down if Netflix fails to continue to win programming rights to hit TV series and movies. For now it has to face and beat the some more competitors, including Apple, Amazon, Hulu and YouTube.

If that happens, there will be more attention on Netflix’s huge programming bills, and “then we could see an investor backlash,” CFRA Research analyst Tuna Amobi says. “But Netflix has been delivering great subscriber growth so far.”(source: Los Angeles Times).

As mentioned earlier, the company’s debts have totaled up to $21.9 billion, a massive leap in cost considering the previous year’s results. What the company is undergoing through such transactions is referred to as negative cash flow in the accounting rapports. The huge cash outflow pertains to a trend that is bound to follow the company for several upcoming years since the company’s service tries to diversify its video library to appeal to the divergent tastes in about 190 countries.

What’s surprising here is that despite the negative cash flow, according to the US terms the company has remained lucrative, earning up to $130 million on $3 billion in revenue in its latest quarter. Furthermore in order to ward off the gloom cloud of debt, it aims to increase the subscription rates, which would eventually result in them coming out of debt in no time.

However, increasing rates might lead to the viewers leaving the subscriptions, a thing happened to Netflix in past when it increased the rates. Hence the plan might as well boomerang, causing the firm to be trapped in the vicious cycle of debt all over again!

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