Netflix Upgraded to BBB+ Credit Rating Due to Password Crackdown and Ad Tiers
S&P Global Ratings, one of the Big Three credit rating agencies, has upgraded Netflix from BBB to BBB+. This shift comes about due to the streamer’s improved margins and strong cash flow, indicating that S&P believes Netflix’s outlook is stable.
A major reason for this upgrade has to do with Netflix’s recent password sharing crackdown. Last month, Netflix limited the number of users on a single Netflix subscription to only those who live in a subscription’s household. It also gave out-of-household viewers the option to stay subscribed to their current account for an additional $7.99 a month.
At least as far as credit ratings are concerned, this move has been a success. S&P noted that this password remodeling has accelerated “subscriber gains.” In its second quarter, Netflix reported 5.9 million net subscriber additions. Though the streamer’s advertising revenue from its new ad-supported tiers is still “modest,” the credit reporting agency expects that figure to accelerate in the coming years.
As of June 30, Netflix’s S&P Global Ratings-adjusted leverage was 1.2x. The credit rating agency has forecasted that number will remain below 1.5x throughout the rest of the year “absent any meaningful acquisitions.”
S&P also pointed to Netflix’s altered content spending due to the ongoing WGA and SAG-AFTRA strikes as contributing to this categorical change. The company predicts that Netflix will generate “over $5 billion of free operating cash flow” in 2023. That’s up from 2022’s $1.6 billion. A big reason for this year-over-year disparity is because Netflix’s content spending is down due to the ongoing strikes. Even without the strikes, S&P predicts that Netflix’s free operating cash flow (FOCF) would approach $4 billion in 2023. The company also expects Netflix’s FOFC will be more than $4 billion in 2024 “with growth in 2025 and beyond.”
S&P also pointed to Netflix’s financial policy as a major positive. Currently, that policy involves keeping gross debt between $10 billion and $15 billion and holding onto about two months of revenue as cash, which totals about $5.4 billion.
As for why Netflix was promoted to BBB+ rather than a more desirable A grade, that comes down to how long the streamer has been eligible for an investment grade and the “rapidly evolving” state of its industry. S&P only labelled the company as investment grade worthy in 2022. But even though the agency noted the complicated climate of the ongoing strikes, it stated Netflix is “better positioned to weather the storm.”
The credit rating agency may also be open to raising Netflix’s rating depending on what happens moving forward.
Along with Moody’s, and Fitch Group, S&P is one of the Big Three credit rating agencies. These agencies ratings measure a debtor’s projected ability to pay back debt in a timely way as well as the likelihood of said debtor defaulting. S&P’s highest rank possible is AAA, a grade that currently only Microsoft and Johnson & Johnson possess. Other BBB+ companies include Anheuser-Busch InBev SA/NV (commonly known as AB InBev), the pharmaceutical company AbbVie, American Express and Citigroup.
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