Ratings agency S&P upgraded Netflix’s corporate credit Tuesday, figuring the giant streamer will spend $3 billion less than anticipated this year on content production. It cited accelerated subscriber growth, improving margins, reduced cash flow deficits over the next two years and positive trends in SVOD.
The agency is basically saying that reduced spend from pandemic-related production shutdowns will work out to improved free operating cash flow, or FOCF, a key metric, boosting Netflix’s financial profile going forward. Netflix has already been benefiting from accelerated subscriber growth and increased user engagement as consumers spend more time at home.
This year Netflix will likely generate positive free operating cash flow, S&P said, but with the positive impact longer term that means the company will be able to reduce its FOCF deficit in 2021 and accelerate an FOCF break-even point.
The agency boosted the rating a notch to BB from BB-. The outlook is stable, “reflecting our expectation that Netflix will continue its solid global operating performance.”
The pandemic, S&P noted, “has resulted in an industry-wide halt to production over the past several months and while some production has resumed, we expect it to take awhile before it returns to pre-pandemic levels. As a result, we are reducing our forecast for cash content spending by about $3 billion in 2020. Even if Netflix is able to return to our previous expected cash content spending levels of about $19 billion in 2021, it will still have over $3 billion less FOCF deficits cumulatively over 2020 and 2021 than we previously expected. This will reduce its funding needs over that time, resulting in less debt, lower leverage, and a faster-than-expected path toward being FOCF break-even on a sustained basis.”
Wall Street punished Netflix, knocking the stock lower, after it reported second quarter earnings earlier this month when the company anticipated subscriber growth would slow in the current third quarter after surging by 10 million in the second.
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