Netflix’s eye-popping rise on the stock market has hit a speed bump: Shares of the streaming giant fell as much as 5% Tuesday, after the company announced its biggest junk-bond offering to date.
The sell-off came after Netflix on Monday evening priced $1.9 billion in debt financing, cash it intends to use to feed its growing appetite for original programming. The company has projected a content budget of $7.5 billion to $8 billion for 2018.
Shares were down 4.2% as of 1:40 p.m., to $305.32 per share; Netflix stock closed down 2.8% Monday after it announced initial $1.5 billion debt-funding plans. [UPDATE: Shares closed Tuesday down 3.7%, to $307.02, putting Netflix’s market cap at $133.5 billion.] Still, the stock is trading up more than 50% since the beginning of the year.
The dip signals investor potential concern about Netflix’s heavy cash-burn strategy. The company is forecasting free cash-flow to be negative in 2018 — to the tune of as much as -$4 billion — and says that will continue for the next few years. The stock decline could also reflect profit-taking after shares have hit record highs this month, after Netflix posted strong first-quarter 2018 subscriber net adds in spite of a multi-territory price hike.
Netflix hasn’t been secretive about plans to assume more debt, regularly informing investors of its intentions to issue more junk bonds (which carry a higher yield and higher risk than investment-grade bonds).
“[W]e believe the debt is lower cost of capital compared to equity,” as the company said in its April 16 shareholder letter.
The $1.9 billion proposed debt offering is the biggest in Netflix’s history, and the fifth time in a little more than three years that Netflix is raising $1 billion or more through bonds. As of March 31, Netflix had $6.54 billion in long-term debt and $17.9 billion in streaming content payment obligations (of which $3.44 billion are long-term content payment obligations).