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S&P Upgrades Netflix To Investment Grade On Streaming Dominance, Solid And Improving Financials

Jill Goldsmith
·2 min read

S&P has upgraded Netflix to investment grade, admiring the streamer’s financial profile as it continues to lead the market in an increasingly competitive OTT landscape. The ratings agency said Monday it sees the company remaining the dominant player and it took its senior unsecured debt rating from BB+ to BBB blue chip status with outlook stable.

Shares of the company behind Squid Game are up about 1.4% at $674.

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In its report, the agency gave a shout-out to solid revenue growth, rising margins, reduced leverage and positive free operating cash flow in 2022 and beyond. It said its assessment of Netflix is now similar to how it sees Disney’s business risk, although it still views the latter’s overall business as more favorable given iconic franchises monetized across movies, television and theme parks.

Netflix’s massive investments in content to get where it is today had led it to weaker cash flow compared to entertainment rivals, but that spending has begun to moderate while most of its peers “are still in the early stages of building their own scaled OTT services.” Netflix said at its latest earnings last week that it expects sustainable positive free cash flow starting in 2022.

Back in January, it noted that it would no longer need to access the debt markets to fund its operations, would use excess cash for share repurchases and would maintain gross debt of $10 billion-$15 billion over the longer term – parameters that support improving credit metrics, according to S&P.

Netflix was hit in the 2021 second quarter by slower subscriber growth, expected due to tough comps with a 2020 that saw record Covid-related adds. About 18 million net adds are forecast for this full year compared with 37 million in 2020. S&P anticipates 25 million to 27 million new subscribers in 2022.

Investments in local language international content, is supporting a strong rise in its international subscribership, which has accounted for close to 90% of its net subscriber adds since 2018.

Netflix had $7.6 billion of cash and short-term investments as of Sept. 30 and access to a $1 billion undrawn revolving credit facility maturing in 2026. Its debt stands at $15.6 billion.

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