Netflix: Half Baked Thoughts

I don’t own Netflix stock. I’m not really interested in owning Netflix stock either. So why am I writing on it?

I’ve publicly written on many of my favorite stocks. In time I will see if I am right or wrong and will hopefully learn from it. Since I’ve publicly made the bull case for many of these stocks, I can go back and understand where I made a good or bad call. I can do this across many stocks and hopefully deconstruct common root structures that will help me make more money. I only have twenty positions, is that enough information to look back on? Probably. But I think I’m making even more errors with which stocks I’m not buying. So, I’ll write on those to add even more data to look back on.

Netflix is a fascinating company. They’ve proven bears wrong over and over again. Could bears be right this time?

Star Wars or Tiger King?

The fleeting nature of their content worries me. Tiger King was the shit for a hot minute, now no one talks about it. I see this happening over and over again with Netflix. All these movies are at the top of the charts, but will anyone care in a year? What is the point of owning content if you don’t get the benefit of it’s continued popularity?

Netflix has spent more on content than HBO has. Who has a better backlog of content? Netflix is fighting for the now, while HBO and Disney are making evergreen content. Netflix feels like they make their content based on an algorithm. They have so much data and can use that to see what people want to watch. I worry long term that isn’t sustainable. Great art transcends time. Tiger King doesn’t.

Optionality

Optionality saved Netflix, numerous times. First, the successful switch from DVDs to streaming was an extremely impressive transition. Then Netflix started creating their own content. Despite my apprehension on the quality, this move has once again saved Netflix. 57% of new subscribers cited original content as their reason for subscription. If they didn’t have their own content, I don’t think they would be where they are today. What is next? Does Netflix have future optionality?

Sports is the obvious answer, yet Netflix has shown no inclination to enter this market. I love fantasy M&A and I think a WWE acquisition could be fun. It could provide intellectual property to Netflix and also allow them an easy intro into live “sports” (sorry WWE fans). That being said, Netflix has shown no interest in entering the sports market.

Gaming would be my next guess and has huge possibilities. My favorite part of Netflix entering gaming would be the possible gamification of the viewing experience. Netflix has tried this with “interactive” shows, but frankly they are all terrible. Adding gaming could be cool and successfully mixing gaming with content would be awesome.

The final big option I see is an ad supported model. This is a tough transition to make. The freemium model is awesome, but having paid users transition to ad supported users would be extremely tough to swallow. However, if it’s what the consumer wants, why not give them the option? If you don’t, someone else will.

A Cool Company

One thing that really stands out to me on Netflix is that they auto cancel unused subscriptions. This move has to cost Netflix hugely in financials. Yet it is the right thing to do. I love when companies choose the right thing over the profitable thing. Respect.

The Future of Streaming

Streaming is massively beneficial to users. The benefits alone of on-demand streaming are massive and that doesn’t even consider the influx of new, high quality content.

Streaming is consolidating. Disney+ is a monster, with a huge market, great brand and growing content. Layer on Hulu and ESPN+ and Disney is sitting pretty. Amazon Prime is an insane value versus the others (when layering in all the other Prime benefits). That was before the MGM acquisition. Why wouldn’t Netflix have made that acquisition? Content and IP is king and MGM is rich with it.

And I haven’t even talked about Roku, YouTube TV, Discovery, Fubo (lol), etc… Consolidation will keep happening in this industry. I do think people will start asking questions if they are collectively paying more for streaming services than they were cable. Netflix’s highest cost of membership is already $18 per month. Amazon is $120 per year. The costs add up quickly.

Financials

User growth is slowing and future users will drag down ARPU. Much of the future growth will come from India and will require a significantly discounted rate. While the valuation is high-ish, it’s not absurd at 47.6 NTM P/E.

A point of interest for Netflix is how they account for their content. Netflix recognizes 90% of the content cost within the first four years of the content. This seems relatively reasonable to me, but how well their content ages will be a key area for Netflix (and a concern for me).

Why I Don’t Own Netflix

Netflix has an incredibly rich history, huge network effects and a strong subscription business. They’ve proven bears wrong over and over again. They should have massive optionality, but I just don’t see it. Without that, I’m just not comfortable paying up for Netflix. I see a ton of great things in Netflix, and a lot of concerns as well. But I would never doubt the bulls or Netflix. They’ve proven everyone wrong over and over again.