Shares of Netflix Inc. got a boost Thursday, after the streaming video giant’s credit rating was lifted out of “junk” territory at Moody’s Investors Service, matching S&P Global Ratings’s move more than a year ago.
The rule of thumb is, if at least two of the major credit-rating agencies rate a company’s credit as investment grade, then that company’s credit is “officially” considered to be investment grade.
Moody’s said late Wednesday that it raised the rating on Netflix’s
senior unsecured notes to Baa3, which is the lowest investment-grade rating, from Ba1, which is the highest speculative grade, or “junk”, rating. The rating outlook is “positive,” which suggests the next rating move is likely to be another upgrade.
“Moody’s anticipates that growth in subscribers from the recently launched ad supported service will be gradual but steady and provide a strong long-term opportunity for revenue growth given the mass audience potential and shrinking ad avails in the linear television ecosystem,” Moody’s credit analysts wrote.
Also read: Netflix could be seeing ‘significantly stronger’ user growth amid password crackdown.
The stock rose 1.6% in afternoon trading, putting it on track to close at a six-week high.
The rating agency said it expects Netflix to remain the “leading direct-to-consumer subscription-video-on-demand (SVOD) single Tier-1 platform in the world,” as it continues to execute its business plan effectively despite increasing competition and continues to improve its fundamental and financial credit profile.
“Moody’s also anticipates that the only near-term price increase will be related to the password sharing initiative, which could cause short term subscriber discontent and disruption, but presents the company with a material revenue growth and margin expansion opportunity,” Moody’s wrote.
In addition, the company’s implementation of a target debt range of $10 billion to $15 billion, “which they are now squarely in,” demonstrates its commitment to sustaining investment-grade credit metrics.
The upgrade by Moody’s comes 17 months after S&P Global Ratings raised Netflix’s credit rating to BBB, which is the second lowest investment-grade rating, from BB+, the highest speculative-grade rating. The rating outlook is stable.
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Netflix’s stock has rallied 14.4% year to date, while the Communication Services Select Sector SPDR exchange-traded fund
has run up 18.1% and the S&P 500 index
has tacked on 5.1%.