Bear and Tracy,
I’m flattered by the kind words. I have no idea where NFLX will end up, but thought it appropriate to post my NFLX run-through for those who are interested. In the end, the company got 7 points, which isn’t outstanding, but is still pretty high.
Greetings Fools,
Using my Anti-fragile framework, I wanted to show how NFLX stacks up.
Barbell Strategy
Mission Statement
Reed Hastings is a brilliant man and this entire page is worth a read. I wish he could just simplify it down to a sentence, but this is a good starting point:
https://ir.netflix.com/netflixs-view-internet-tv-replacing-l…
In general, it seems to me that Hasting’s mission is (last sentence from above page): “to lead the transition from linear to Internet TV by offering an amazing entertainment experience.”
Simple: Yes, if I’m an employee, I either ask “Will this help the transition to Internet TV?” or “Will this provide an amazing entertainment experience?”
Optionable: Not as much. Don’t get me wrong, Netflix has already shown incredible optionality. But on the basis by which I’m judging this, Hastings clearly states that Internet TV is the core medium he’s going for.
Inspirational: Definitely
+1.0 points
Moat
Brand: This is definitely the most powerful part of Netflix’s moat. Not only is Netflix’s brand important, but the popularity of its original programming is vital. That’s the hook. That’s what gets new users to sign on. With such a low price point, that’s all that’s needed to seduce a non-user to join.
+1.0 points
High Switching-Costs: Ok, so this is going to sound a little kooky – but I actually think Netflix has the advantage of ridiculously low-switching costs. But that’s a good thing. I wrote an article about it here: https://www.fool.com/investing/the-under-appreciated-feature…
Here’s the key takeaway:
I’ve always been concerned about the robustness of the company’s moat…
Then I stopped worrying, because … it simply doesn’t much matter what the company’s moat is.
Here’s what I mean: My wife and I have been Netflix subscribers for over a decade. We go through spurts where we binge watch shows … and periods when we don’t watch anything at all on it. We like the original content, but we like other stuff, too. We even pay for other services, like Amazon Prime Video.
But we’ve never once considered cancelling our subscription. The monthly payments are auto-billed, and are so low that we don’t even really notice them when they pop up on our credit card statement. At this point, adding additional streaming services like Hulu or HBO Now wouldn’t mean that we’d think about dropping Netflix. The new and the old would just supplement each other.
I’m not sure what to call this, but at this point, the price is so low, and the payment automatic across the board, that I have to believe that retention of users beyond one year is pretty high.
+1.5 points
Network Effect: This isn’t the strongest, but worth mentioning. Netflix’s original content is really the key driver. The rest of the stuff is legacy and nice to have, but the original stuff is where the leverage is. The network effect takes hold when each additional user adds value to the service.
I would argue that my brother subscribing doesn’t add all that much value to me. Except that each additional user gives the company $100 or so more dollars per year to spend on original content, which makes the service more valuable. The roster of subscribers literally means that there’ll be a higher liklihood of quality content.
+1.5 points
Optionality
Like I said above, I don’t necessarily think there’s a ton of optionality left for Netflix, but we can’t ignore the fact that I probably would have written the same thing ten years ago – unable to understand what a big deal streaming would be.
While the pivot from DVD to streaming was painful, Hastings had the guts to kill his cash cow in order to remain relevant in the decade to come. That’s literally what Blockbuster was unwilling to do, and why it didn’t survive. The further pivot to original content was further proof of optionality. And of course, the company is doing a great job of taking low-risk, high-reward bets on specific programs as well.
+2.0 points
Skin in the game
Role of founder: Hastings is CEO
+1 point
Insider Holdings As of the last proxy, insiders together owned 4.9% of shares outstanding. Hastings owned 2.7% of shares outstanding.
+0 points
Glassdoor: The company has a 3.7 star rating (out of 5).
+0 point
Financial Fortitude
Financial statements
Cash: $1.75 billion
Debt: $4.9 billion
Free Cash Flow: ($2.1 billion)
Remember the importance of original content I talked about? Well, it ain’t cheap. Neither is setting up shop in virtually every country in the world (sans China). While I obviously think that’s the right move, we can’t ignore the financial fragility it introduces into the equation.
While I don’t think some kind of unpredictable event that I can’t think of (i.e. who would have predicted Qwikster before it happened?) would bankrupt the company, it would definitely weaken it, relative to the competition, if it were to hit
-1 points
Concentration Risk
None
0 points
Total Score: 7.0 points
I’ve run companies through this framework for well over a year, but I do it anew every time (I find that doing so…while laborious…forces me to be more aware of the current situation). As such, I don’t have a huge database to draw from. This lands NFLX near the middle of the list, though I suspect if it included all publicly-traded companies, it would be pretty high.
The view from 30,000 feet is pretty easy to understand: the company’s low price and automatic payments give it a surprisingly strong moat. And it certainly has optionality when it comes to programming. At the same time, the balance sheet is levered enough that some type of disruption (imagine if Netflix or its subscribers had to start paying significantly more for the bandwidth it requires) could be a huge blow.
Brian
See all my holdings here: http://my.fool.com/profile/TMFCheesehead/info.aspx
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