Analysts continue to speculate that Netflix will need to raise additional capital as it bolsters investment in original content, grows its platform and make good on existing commitments.
On the firm's third-quarter earnings call, CEO Hastings said the company wasn't considering a capital raise. However, analysts from Jefferies and Credit Suisse both continued to point out the possibility in Tuesday research reports.
"We find it difficult to justify this valuation given the risks of rising content costs, heavy competition, and the likelihood Netflix may need to raise additional capital to fund operations," Brian Fitzgerald, a Jefferies analyst said in a Tuesday research report.
"With more competitors bidding on ever pricier content, we think content owners will be in the driver's seat at the negotiating table, perhaps forcing Netflix to share more of the total economics of a given deal. As a consequence, we believe current Street gross margin expansion assumptions may be too optimistic," Fitzgerald added.
The analyst also said Netflix may need to raise capital given its relatively minuscule free cash flows and content liabilities that now stand at $6.4 billion to go with $500 million in long-term debt.
A capital raise would be an obvious way to continue to handle the financial burdens of growth, without putting the firm's operational capacity and earnings at risk.
"In calendar year 2003 we were the highest performing stock on Nasdaq. We had solid results compounded by momentum-investor-fueled euphoria. Some of the euphoria today feels like 2003," Hastings said in his investor letter. Such comments may undermine Hastings' ability to offer additional Netflix shares to investors; however, they also indicate a strong rationale for even a minor stock offering.
Why not take additional capital from investors, especially at a price that could minimize dilution for existing shareholders? There is no guarantee, after all, that capital will be available at such attractive prices further down the road were Netflix to stumble in its seemingly stellar execution. Netflix shares were falling nearly 8% in Tuesday trading at $327.50 on analysts concern the company's shares may be fully valued. -- Written by Antoine Gara in New York Follow @AntoineGara
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