While Netflix (NFLX) may not be subject to the same type of regulatory beatdown that could befall other FANG stock components (Facebook, Amazon and Alphabet), that doesn’t mean the streaming beast is a can’t miss investment from the much hyped tech acronym.
On the other hand, it’s President Donald Trump’s dual trade wars with China and Mexico that could wallop Netflix.
By injecting increased uncertainty into risk asset markets globally and the boardrooms of Corporate America, the Trump administration could make it more financially penalizing for Netflix to raise the low cost debt it needs for expansion.
“No doubt. It raises uncertainty, it raises spreads,” debt investing specialist Mike Depalma at Mackay Shields said on Yahoo Finance’s The First Trade.
“It will be a lot more expensive for them [Netflix] to raise debt. I would avoid Netflix,” added Depalma,
Depalma is correctly connecting the dots, says Mr. Market.
Netflix’s stock has slightly underperformed the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite during the market’s latest batch of turbulence this past month.
Indeed, Netflix is addicted to debt as a means to fund its aggressive global streaming plans. The last thing it needs is a higher cost of capital, which could raise already worrying levels of quarterly interest expense outlays.
Netflix ended the first quarter with some $10.3 billion in debt after a recent $2 billion raise. Interest expense hit a dizzying $135 million in the quarter, up from $128 million a year ago (it’s on pace to surpass 2018’s interest expense of $291 million). Netflix burned cash at a faster rate in the quarter than a year ago.
Over the past year, Netflix’s free cash flow has been a startling $3.5 billion. The company has said frequently it will continue to tap the debt markets as source of cash to use for its expansion plans.
“We want to avoid companies that consistently lose money, Netflix would fall under that category and so would WeWork,” said Depalma. “Netflix is a company that hasn’t been able to demonstrate that they can actually make money.”