Via Financial Times

Residents of New York, Los Angeles and Chicago woke up on March 20 to life under lockdown: for the first time in the coronavirus crisis, millions of Americans were ordered to stay home. 

That same morning, Netflix added seven new programmes to its platform — among them a docuseries about the lurid life of a zoo operator named Joe Exotic. In the next 10 days, Tiger King went on to become a smash hit, with more than 34m Americans tuning in, according to Nielsen.

In results next Tuesday, Netflix will kick off an earnings season for media companies, giving investors the first comprehensive look at how the global pandemic has affected the entertainment business. 

For much of the past year, investors and Wall Street analysts had grown increasingly worried about Netflix’s negative cash flow, slowing US subscriber growth and lavish spending on content.

Meanwhile, Disney soared, as chief executive Bob Iger pushed into Netflix’s territory with the launch of its own streaming service, called Disney+. Over the course of 2019, Disney’s stock price increased 35 per cent while Netflix shares gained 20 per cent, underperforming the broader stock market. 

Then the coronavirus pandemic hit, and this dynamic — like many others across the business world — has been flipped upside down. Three out of Disney’s four businesses are in peril, as theme parks and cinemas are shut and a slump in advertising hurts television. But Netflix, which does not run adverts, is benefiting from a surge in online streaming. 

Column chart of Number of subscribers (m) showing Streaming subscriptions accelerate in the US

Netflix has become one of the rare businesses that are not only surviving, but thriving, in the stay-at-home era. The group’s shares reached record highs this week as its market capitalisation jumped to $192bn, above that of corporate giants such as ExxonMobil and Cisco and neck-and-neck with Disney.

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The same pattern is playing out in bond markets. Netflix’s bonds are junk-rated, while Disney enjoys an A credit rating. But in the crisis, Disney’s borrowing costs have risen while Netflix’s have fallen. 

A 10.5 year Netflix bond now yields 3.6 per cent, down from a peak of almost 5 per cent last October. Remarkably, this is in the same range as the 10-year bond Disney clinched last month with a coupon of 3.8 per cent, despite the two companies’ wide disparity in credit rating.

“I would rather be in Netflix [bonds] all day long at 4 per cent or sub-4 per cent,” than in traditional media, said Jack Parker, senior fixed income associate at asset manager Diamond Hill. “One of the backstops of this bond is the equity. The market cap on top of you is astronomical. And if you believe the debt is the first in the capital structure, which it is, it gives you a massive margin of safety.”

Mr Parker said he believes “the stay at home demand is crazy . . . particularly for Netflix, which is the most popular thing in pop culture”.

Bernstein analysts also argued the credit agencies “have got it backwards”, noting that they rate Netflix bonds at BB-, or “junk” level, while the struggling media group ViacomCBS is rated at BBB, giving it investment-grade status. 

Two line charts showing Disney and Netflix's Ebitda estimates

But public markets are signalling ViacomCBS debt is riskier than Netflix. Recently issued ViacomCBS 10.5 year notes were priced at a 5.1 per cent yield, above the 4.5 per cent that Netflix’s equivalent bonds are trading. 

Netflix sceptics have always pointed to the frothy-seeming multiple of its shares and high debt load, neither of which have gone away. Despite trading about the same market value, Netflix made $20bn in annual revenue last year compared with Disney’s $70bn. A valuation of nine times sales is well above even other internet stocks. Amazon, for instance trades at four times its $280bn revenues. 

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While Nielsen and other data providers have released figures depicting a skyrocketing in streaming during quarantine, Netflix is not immune to the economic destruction. As part of the lockdown, Hollywood lots went dark in March, delaying production of Netflix shows such as Stranger Things and The Witcher.

In a prolonged shutdown, Netflix could run out of new programming, a problem the company has not previously had to cope with. Viewers might cancel their subscription and try another service. There is no shortage of alternatives, with two more streaming services, Comcast’s Peacock and Quibi, launched this month and another new rival — HBO Max — arriving next month. 

So far, Netflix has shown no signs of slowing its voracious release schedule. This week alone the company added 13 new shows and films, with another dozen scheduled for the rest of the month. 

Netflix may also be able to snap up other content on the cheap. Many Hollywood directors have previously clung to releasing their movies in theatres over streaming; but now, with cinemas shut indefinitely and theatre owners headed for bankruptcy, studios are scrambling to sell their movies to Netflix.

The streaming company has seen an influx of pitches from movie studios in recent weeks, said people familiar with the matter, as producers look to at least make some return on their investment. 

Line chart of Market cap ($bn) showing Netflix worth more than Exxon and Cisco

On Tuesday, Netflix is expected to report it added 7.4m new subscribers in the three months ending in March. The company is also likely to reveal more details about its content pipeline during an analyst call with senior management. While Reed Hastings and other Netflix top brass typically pre-tape a video Q&A from the company’s offices, this time around they will dial in from home through Google Hangouts. 

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Netflix typically taps the high-yield bond markets to fill its coffers in April and October, after first quarter and third-quarter earnings. To keep up that cadence, it is due for an issuance this month.

Netflix ended 2019 with about $5bn on its balance sheet, and also holds a $750m credit line, which it has not drawn. Analysts expect that these backstops could get Netflix through the next six months to a year, if needed. Despite its cash pile, “Netflix may want to take advantage of [favourable yields] and access the market now”, said Neil Begley, senior analyst at Moody’s. “Who knows what’s around the corner?”