Stock – Netflix
Ticker – NASDAQ: NFLX
Sector – Communication Services
Halal – We would suggest avoiding
You want to buy Netflix stock, but you’re concerned if it is sharia compliant.
Let’s take a look at their financial results for its fiscal 2020 4Q as of December 31 2020. We’ll use 12 months ended figures rather than the quarterly for a better overall picture.
To consider if Netflix is Shariah compliant, we will use the following criteria which consist of qualitative and quantitative analysis. They include two financial ratios.
- The business (high level is it obviously haram/halal?)
- Interest-bearing debt to total assets ratio
- Illiquid assets to total assets ratio
We will only apply the criteria/financial ratios in this article. If you want a detailed explanation of what each criteria contains, you can read our stock screening article. We also, have a halal stock screener course where you can access the materials anytime and it goes through step-by-step how to actually screen a stock (it helped me a lot).
Before we begin our analysis, let’s take a look at some of Netflix’s highlights. The company’s stock was up over 8% following the below news being released:
- 200+ million paid members. A 30%+ increase from 2019. Approx. 37 million people subscribed last year, including 8.5 million in the last 3 months alone.
- Revenue increase of 24% in Q4 to $6.64bn (£4.8bn). Yearly profits were almost $25bn in revenue and almost $2.8bn in profit
- Aiming to stop borrowing to finance – considering using excess cash to buy back shares, retuning money to shareholders.
New tactics such as a free 48-hour period in India, price increases in the UK, US and elsewhere were some factors that helped with its successes.
However – there’s big competition from Disney+, HBO, Amazon and others. Lots of exclusives coming up from these guys. Disney+ have Marvel and Star Wars releases coming out in 2021.
Now let’s begin to apply our criteria and find out if Netflix stocks are halal.
Step 1 – The business
Net income for 2020 was $2,761,395,000 (two billion seven hundred sixty-one million three hundred ninety-five thousand)
The business cannot have more than 5% of its total income from haram sources.
The business is obvious – provide a streaming service and make money from subscriptions. But how much of this content is halal? Some content will be difficult to categorise as Islamic acceptable or not. Clearly shifting though the 1000s of titles will be a difficult task.
You’ll have to make a judgment on whether Netflix passes this step. Our view is that at least 5% of all Netflix’s content will be non-sharia-compliant so we would fail it on this step.
Step 2 – Interest-bearing debt to total assets ratio
This is the first of the three financial ratios we will use.
The total interest-bearing debt should not exceed 33% of total assets.
Total assets = $39,280,359,000
Current liabilities (interest bearing) = $499,878,000
Non-current liabilities (interest bearing) = $15,809,096,000
Total Interest liabilities =$ 16,308,974,000
We then divide total interest liabilities ($16,308,974,000) with total assets of the company ($39,280,359,000) and x 100.
This gives 41% – which is a Fail.
However, there is an alternative screening method for step 2, as discussed below.
Interest-bearing debt to MARKET CAP ratio
An alternative way of step 2 is to compare interest-bearing debt to market cap – this is preferred by the AAOIFI.
We divide Total Interest-Bearing Debt ($16,308,974,000) with the Market Cap of the company ($221.68bn) and x 100.
This should be under 33%.
In Netflix’ case it is clearly under 33% – therefore Netflix passes this stage.
Step 2 Conclusion
FAILS – CHECK
Ultimately the approach you take on using either the total assets or the market cap depends on the methodology you choose. The scholars are fairly comfortable with either approach – especially in times of market volatility where numbers become abnormal and sharia-compliance thresholds might get triggered a lot as stock market prices seesaw up and down.
Our approach has historically been to prefer the total assets approach unless there are compelling reasons for relying on the market cap approach instead. This should be taken on a case-by-case basis.
Why does Netflix prefer debt over equity?
Netflix funds their investments through operating profits and, historically, by raising debt.
Netflix prefers using debt instead of equity to optimise its balance sheet – they believe it’s more efficient.
They aim for the capital structure that results in the lowest weighted average cost of capital. Given low interest rates, the tax deductibility of debt and their low debt to enterprise value, Netflix believes financing growth through the debt market is currently more efficient than issuing equity.
Let’s go to the final step.
Step 3 – Illiquid assets to total assets ratio
This is the final step.
Illiquid assets should be at least 20% of total assets.
The formula is: Illiquid assets/total assets*100.
Illiquid assets = $29,518,779,000 (the total non-current asset figure)
Total assets = $39,280,359,000
So let’s do the maths, and…
Illiquid assets make up 75.15% of total assets, which is bigger than the min 20% we need.
Therefore, Netflix PASSES this step.
We at IFG take the view that Netflix stock is not sharia-compliant as it likely has more than 5% of its revenue from haram sources.
A summary of our analysis.
- The business – use your judgment but we think best avoided.
- Interest-bearing debt to total assets ratio – FAIL (on the total assets approach)
- Illiquid assets to total assets ratio – PASS
Some Islamic Investment Companies do not seem to have Netflix in their investment portfolio, such as HSBC Islamic Funds, Wahed Invest and Iman Fund. You can compare some funds on our Halal Investment Platform.
If you want a detailed explanation of what each criteria contains, then check out our halal stock screener course.
Please note AAOIFI are currently revising their standards, so the above may be subject to change. Please find the AAOIFI standards here. Furthermore, you must screen each stock after new figures are released to ensure there are no changes to permissibility.