To be taken with a pinch of salt, Danish investment banking company Saxo Bank published its 10 Outrageous Predictions for 2019 this week, a list which contained two particularly brazen prophecies that – should they ever come true – would send shockwaves through the digital entertainment world. It predicts Netflix’s funding costs to double, causing a dangerous deceleration in content production, wreaking havoc on its share price, and also projects Apple to resort to an acquisition of Tesla to achieve its much-craved entrance into the car industry.
As far-fetched as they may be, neither are impossible outcomes, so much so that we feel almost forced into covering it.
While we can half agree that the prospect of Netflix’s content costs spiraling out of control is a reasonable prediction, the fact Saxo Bank predicts this will come as a direct result of Disney’s entrance into the streaming market is not something we can take lightly. Netflix is now lightyears ahead of Disney in all aspects – speaking technologically, by content output, and obviously by subscriber count.
But Disney will not be the main catalyst in the crash, according to Saxo Bank. “2019 proves the year of credit dominos toppling in the US corporate bond market. It starts with General Electric losing further credibility in credit markets, pushing the credit default price above 600 basis points as investors panic over GE’s $100 billion in liabilities rolling over in the coming years at the same time as the firm sees deteriorating cash flow generation. The carnage even spreads as far as Netflix where investors suddenly fret the firm’s fearsome leverage, with a net debt to EBIDTA after capex ratio of 3.4 and over $10 billion in debt on the balance sheet. Netflix’s funding costs double, slamming the brakes on content growth and gutting the share price,” it states.
This will do little to quell the panic-stricken finger pointing at Netflix’s rising content spend which has become synonymous with Wall Street the moment a new Netflix financial filing arrives. However, as we have highlighted on numerous occasions, Netflix continues to disprove its doubters. Granted, its debt as of the end of September stood at $8.3 billion, rising sharply from $4.9 billion a year earlier, and the company is now seeking an additional $2 billion in debt securities to fund its production conveyor belt.
On that note, additions to streaming content assets clocked in at $3.24 billion for Q3, a quarterly increase of just over $200 million, bringing the nine-month 2018 total to $9.26 billion. In a letter to shareholders, Netflix warned a higher mix of original films for Q4 is expected to hit operating margin by between 5% and 7.5%. But just as content spend rises, so does its total cash, growing from $1.75 billion at the close of Q3 last year, to $3.07 billion today.
Saxo Bank adds, “The negative chain reaction in corporate bonds sets off massive uncertainty in high-yield bonds leading to a Black Tuesday for exchange-traded funds (EFT) tracking the US high-yield bond market where ETF market makers are unable to set meaningful spreads, forcing a complete withdrawal from the market during a tumultuous trading session. The fallout in the ETF market becomes the first warning shot of passive investment vehicles and their negative impact on markets during turmoil.” Remember this stuff is supposed to be funny.
Down the other end of the spectrum we have Apple which cannot seem to transform itself into the streaming business it has spent $billions striving for, as well as sizable sums on more miscellaneous endeavors such as building autonomous cars. Going by Saxo Bank predictions, Apple will eventually get fed up and buy Tesla at a huge $520 a share, a 40% premium. Aside from making Musk even richer, the takeover would make Apple CarPlay a serious force in in-vehicle infotainment systems, basically giving it a monopoly on in-car radios and music streaming in electric cars. Apple could even add screens through which to drive its video streaming efforts.
“The acquisition makes perfect sense. It’s small enough to be an all-cash deal and it only represents 12 months of Apple’s free cash flow. The two companies are both focused on engineering and design in hardware coupled with vertically integrated distribution models in high-fashion areas. Apple has the financial strength to fulfill Elon Musk’s wildest dreams,” said Saxo Bank’s Peter Garnry, Head of Equity Strategy.
Yes, this is the very same Apple which famously shies away from its check book when it comes to making big acquisitions, preferring to hook much smaller fish. Perhaps it’s about time that changed – stranger things have happened.