Time to Netflix and Chill Out

To some, the “streaming wars” might seem like they have just begun; to us, the “streaming wars” are over, Netflix has already won. 

Confidently investing in a stock does not begin nor does it end with looking at its price to buy a share. Think about when you buy a car, sure its price determines if you can afford it, but it does not determine if it is worth owning. You must determine its value which includes a plethora of information such as gas mileage, reliability, warranties, capacity and functionality. You are not going to invest in a car that you cannot rely on when things are tough. Thus, we invest in stocks with a similar mindset and our most current and prominent example comes in the form of a company called Netflix. We are going to build a case for its value with no mention of its price and see if we can sell you on facts not looks. According to Netflix co-founder Marc Randolph, back in 2000 Blockbuster had an opportunity to buy Netflix for $50M; the CEO of Blockbuster, John Antioco, laughed at the thought of it at their meeting together in Dallas. John Antioco and his arrogance could not fathom that any business model associated with the “dot-com” era could ever be sustainable or profitable. However, ten years later, in September 2010 Blockbuster filed for bankruptcy and Netflix’s stock is worth, as of today, about $179.87B. Currently, Netflix has over 182 million subscribers worldwide and Ark Invest believes that Netflix can hit 400 million subscribers by 2023 and that is with no access to the Chinese market.  Basically, Ark Invest is saying that Wall Street is undervaluing Netflix and its potential in the coming years; we tend to agree. On top of that, Netflix mainly relies on their subscription fees as the primary source of income and refuse to allow advertising on its platform. We believe that Netflix has many more potential avenues to explore for further revenue that includes advertising, tiered plans, further box office success, etc. So, let us look at their box office success because anyone can create a stream, but you need quality content to keep people coming back paying on a monthly basis. Netflix has a huge library of over 5,000 different movies and shows for subscribers to watch at any given time and that has not taken any toll on quality.  Netflix original content raked in 24 nominations at the 2020 Oscars, beating out every single other studio for the most nominations.  They were also 1 of only 6 studios to win multiple Oscars.  This kind of success breeds attractions from high quality talent and producers for further feature films and shows to add to their library.  The more recognition Netflix gets from Hollywood the easier it is for them to get exclusive deals to the hottest actresses, actors and producers for new content, a huge competitive advantage. This is no fluke either, as Netflix is spending more money on content than any other company, by far, in the industry.

While, Netflix has an indisputable quality and excess of content at a reasonable price with no ads, their business also has a few other cards in their hand. For example, Netflix states that its users watch an average of 2 hours on Netflix per day.  This equates to roughly 121.9 million hours watched per year.  That is a TON of data that Netflix is collecting from its subscribers.  Netflix’s biggest competitive advantage is their algorithm, which is constantly fed from the massive viewership data collected from their subscribers viewing habits, preferences and being able to identify unmet needs.  This gives Netflix an exclusive advantage on their competition on deciding what new original content to create and how allocate funds to most satisfy its subscribers and keep them watching. This cycle of viewership and data is almost like a streaming ecosystem that creates a perfect balance on all ends. Another piece of information to consider is that Netflix has chosen to use debt as its primary source of funding in a world of all-time low interest rates.  We believe, this is both incredibly dangerous but also incredibly intelligent if used properly.  Netflix effective interest rate on its debt at the end of Dec 2019 was 5.23% and its return on equity for 2019 was 29.12%.  Any company, I do not care who you are, who can borrow money at 5.23% and generate returns of 29.12% is running an astonishingly incredible business; this process is extraordinarily successful.  We fully expect that Netflix will continue to use debt to fund future projects at these low costs and high rate of returns well into the future; this does not scare us as they have proven to use debt efficiently and responsibly.

In the COVID-19 crisis we are seeing Netflix’s staying power. Once again referring to Ark Invest, as of 2019 Netflix cost the user only $0.22 cents per hour viewed vs $0.81 cents per hour viewed for Cable.  That is a massive difference, and Ark is estimating that by 2024 the margin will widen further with Netflix costing about $0.34 per hour viewed and Cable $1.08 per hour viewed.  Netflix’s business model is as recession proof as it gets inside the stock market.  Quality entertainment at the convenience of viewing in your own home is worth a lot in people’s minds today and the monthly cost of Netflix is incredibly manageable for the value you receive in return.  We would argue that it would be one of the last things a subscriber would part with just before food, water and shelter.  At plans ranging from $8.99 – $15.99 per month, even a person with a job making minimum wage could argue that sparing 1-hour worth of wages per month for unlimited hours of movies, shows and entertainment is well worth the trade. Netflix’s value comes from many different sources and angles, but one of the most important angles comes from the idea that their service is on the verge of a household necessity.


I/we are long Netflix. Any assertions made are opinion and we are not receiving any compensation for this post other than ad revenue from WordPress and personal donations. Phullplate.com has no business relationship with any stock mentioned in this article. Phullpalte.com is not a registered investment, legal or tax advisor or a broker/dealer. All investment/financial opinions expressed by Phullplate.com are from the personal research and experience of the owners of the site and are intended as educational material. Although, best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.

4 views0 comments