NFLX - Netflix

[yadayada]

I love how manic the market is on this one.

2011: 300$ THE MOAT IS MASSIVE ON THIS ONE

2012: 60$ oh well I guess not

2014: 400$+ MOAT IS BACK AGAIN BUYBUYBUY

 

Makes me think you should just wait this one out and hope the market gets panicky again.

[ccplz]

Doubling its subscriber base and more than doubling margins would fill the gap between $226M and $1,160M (5.13X).  I think both are doable.

 

Doubling subscriber base is definitely doable, but how do you suppose NFLX can double it's margins?

 

And that's not even including maintenance capex etc.

[JAllen]

What is maintenance capex for NFLX?

[saltybit]

Netflix: Long term view

http://ir.netflix.com/long-term-view.cfm

[frommi]

Bought a bigger position in NFLX today. I really like the content they create and their global expansion is just starting. Based on my napkin math they should be able to double the subscriber base in 3-4 years and every additional customer $ goes directly to the bottom line. Even if you believe that they don`t generate profits today, (which i don`t) that means 8 billion $ earnings in 2020. Put a conservative multiple of 15x on it and we are at a 120 billion marketcap company in 4 years. Thats nearly a triple from here. Any flaws in my thinking?

[Guest Grey512]

I did similar math. No flaws that I can see. The risks here are:

 

1) NFLX will need to tap the capital markets a few times in the coming 18 months. That makes it a little vulnerable. This is not a hyper-growth company that can bootstrap itself. This is a hyper-growth company that needs shovelfuls of cash for a few more years.

2) Reed Hastings may get run over by a bus.

3) AMZN has deeper pockets and is increasingly going after NFLX. Did you watch the Golden Globes recently? Bezos made sure to attend; big triumph for them (Mozart in the Jungle; Mr Robot not technically a full AMZN production but it's seen that way, etc).

 

Long term, domination looks almost inevitable. But it will be a tough fight a very volatile ride in the share price until we get there.

[JayGatsby]

Bought a bigger position in NFLX today. I really like the content they create and their global expansion is just starting. Based on my napkin math they should be able to double the subscriber base in 3-4 years and every additional customer $ goes directly to the bottom line. Even if you believe that they don`t generate profits today, (which i don`t) that means 8 billion $ earnings in 2020. Put a conservative multiple of 15x on it and we are at a 120 billion marketcap company in 4 years. Thats nearly a triple from here. Any flaws in my thinking?

A lot of their expenses is content licensing. As subscribers go up content costs will go up, so not direct to the bottom line. There's also a risk that as the industry becomes more mature, prices are bid up and a higher % of revenue goes to the content owner. NFLX will also have to create some original content tailored to new markets. I don't really have a strong view on the value, but that's the bear case.

[frommi]

Bought a bigger position in NFLX today. I really like the content they create and their global expansion is just starting. Based on my napkin math they should be able to double the subscriber base in 3-4 years and every additional customer $ goes directly to the bottom line. Even if you believe that they don`t generate profits today, (which i don`t) that means 8 billion $ earnings in 2020. Put a conservative multiple of 15x on it and we are at a 120 billion marketcap company in 4 years. Thats nearly a triple from here. Any flaws in my thinking?

A lot of their expenses is content licensing. As subscribers go up content costs will go up, so not direct to the bottom line. There's also a risk that as the industry becomes more mature, prices are bid up and a higher % of revenue goes to the content owner. NFLX will also have to create some original content tailored to new markets. I don't really have a strong view on the value, but that's the bear case.

 

I watched the Marvel and DC comic series (Jessica Jones,Daredevil,Gotham) and i am more than impressed. That is blockbuster material, 10-15 hours of it per serie. That is all Netflix`s own content, which is very efficiently produced without expensive actors. And these are just 3 series, they are creating more content than any other company in the world at the moment, if i recall it correctly.

[Jurgis]

I have no position in NFLX apart 0.0001% of my portfolio that my wife bought when NFLX was 10x lower. So there ... a ten bagger that I can't even brag about and that made almost zero influence on my returns or wealth. ;) Sad story. ;)

 

I would come to this from opposite direction. IMO there's way too many content companies and way too much content (I own shares in STRZA and DISCA plus LGF through them). IMHO, this is what NFLX can still exploit, is still exploiting and will continue exploiting until there is a massive consolidation and cuts in content companies. I.e. content companies still sell their content to NFLX for peanuts because they mostly have to: if they don't sell, competitors will; if they don't sell, they get zero for that content instead of NFLX peanuts, etc. Of course, some of them don't sell and froth from their collective mouths (see DISCA), but overall NFLX still kinda rules.

 

There is a possibility that content consolidation and cuts won't happen: there are always rich people who want to produce content and bask in the glow, so the economics of content may be pushed down by that.

 

I am much more skeptical about NFLX-made-content. Maybe they gonna be the golden boys of content. Looking at the history of film making, likely they won't. Studios/content companies usually drift from hits to mediocrity and back. Disney might be the only exception (some might argue that HBO are too, but I don't think so). Netflix has one weapon against other content companies - instant feedback how many viewers view something, how many stop watching, etc. - but they are not really using it so far. Most their deals (AFAIK) are old-fashioned "season" deals that make no sense for them. They could kill series mid-season based on feedback instead of being forced to make the whole season, but they don't seem to structure the deals that way.

 

Now, going to anecdotal: we have NFLX streaming and NFLX DVD. I wanted to cut NFLX streaming, since we have Amazon Prime. I got overruled. So I guess so far NFLX is winning over Amazon. OTOH, I haven't watched (not interested pretty much) any NFLX content, but this is likely contrarian argument, since my taste is completely non-mainstream. I'd never cancel NFLX DVD(BluRay), since that's the only easy/good way to get newer and rarer content. Even with DVD(BluRay) some rare content is not there... they are not rebuying some older DVDs (bunch of anime series have holes - not available, for example).

 

Not really an investment opinion. ;) Have fun guys.

[TwoCitiesCapital]

They could kill series mid-season based on feedback instead of being forced to make the whole season, but they don't seem to structure the deals that way.

 

The problem with doing such is that some shoes aren't popular until later in their existence. The actors of Breaking Bad thought the show could potentially be canceled after the second season - it wasn't until season 3 that it really hit its stride and picked up a massive fan base and became a crowd favorite.

 

Breaking Bad is, by far, one of the best shows I've ever watched. It'd have been a shame if NFLX cut it after Season 2 simply because it wasn't getting a massive response yet.

 

Also, less in the way of movies, but another personal anecdote. I thought the first two Harry Potter books were mediocre and not very many of my friends were reading them. It wasn't until the 3rd book came out that my immediate friends and myself really go into the story and the books improved from there. Harry Potter has been one of the best franchises for books/movies and yet, it wasn't especially popular until later in its development as well.

 

 

[Jurgis]

They could kill series mid-season based on feedback instead of being forced to make the whole season, but they don't seem to structure the deals that way.

 

The problem with doing such is that some shoes aren't popular until later in their existence. The actors of Breaking Bad thought the show could potentially be canceled after the second season - it wasn't until season 3 that it really hit its stride and picked up a massive fan base and became a crowd favorite.

 

OK. But this then becomes unsolvable problem of content companies: is the series XYZ just crap and should be cancelled or is it a diamond in the rough and should be nourished and polished?

 

(BTW, I did not like or watch BB, but as I said my taste is not mainstream. I also don't know if your claim that they hit success in season 3 is right - I think shows don't get to season 3 without success.)

 

Also, less in the way of movies, but another personal anecdote. I thought the first two Harry Potter books were mediocre and not very many of my friends were reading them. It wasn't until the 3rd book came out that my immediate friends and myself really go into the story and the books improved from there. Harry Potter has been one of the best franchises for books/movies and yet, it wasn't especially popular until later in its development as well.

 

I believe this is just an anecdote. HP books were huge success from book 1: http://news.bbc.co.uk/2/hi/entertainment/820885.stm

[frommi]

I am much more skeptical about NFLX-made-content. Maybe they gonna be the golden boys of content.

 

I thought that way too, until i watched the stuff. I can see a lot of potential for series with Marvel and DC comics content. Nearly every cinema title these studios have created were blockbusters, so its not some noname company creating some films.

[JayGatsby]

Is netflix truly "creating" content or are they funding/buying it? This would say they're just buying most for it: http://deadline.com/2016/01/john-landgraf-too-much-tv-lemmings-streaming-viewership-data-1201684490/

[Jurgis]

I am much more skeptical about NFLX-made-content. Maybe they gonna be the golden boys of content.

 

I thought that way too, until i watched the stuff. I can see a lot of potential for series with Marvel and DC comics content. Nearly every cinema title these studio have created were blockbusters, so its not some noname company creating some films.

 

You have to be careful that this is not top of the wave. I remember time when Marvel the company was bankrupt (well, for a bunch of reasons) and then suddenly Marvel & DC is the golden calf of content and is being milked like there's no tomorrow. I don't know. Maybe you have another 10 years of this. IMO the superhero genre has jumped the shark at least couple years ago. I'd say getting 3rd rate superhero movies and series is sign of the top. "Superman vs. Batman", "Iron man vs. Captain America" also - remember "Alien vs Predator" and all that? But then I don't like superhero movies in general, so that's probably contrary opinion and you should go long all superhero companies available. ;)

[Jurgis]

Is netflix truly "creating" content or are they funding/buying it? This would say they're just buying most for it: http://deadline.com/2016/01/john-landgraf-too-much-tv-lemmings-streaming-viewership-data-1201684490/

 

I don't think there's important difference between the two. Do you think there is?

[Sionnach]

I have no position in NFLX apart 0.0001% of my portfolio that my wife bought when NFLX was 10x lower.

 

I think the lesson in all of this is pretty clear: listen to your wives.

[Jurgis]

I have no position in NFLX apart 0.0001% of my portfolio that my wife bought when NFLX was 10x lower.

 

I think the lesson in all of this is pretty clear: listen to your wives.

 

"Happy wife, happy life!"  8)

[TwoCitiesCapital]

They could kill series mid-season based on feedback instead of being forced to make the whole season, but they don't seem to structure the deals that way.

 

The problem with doing such is that some shoes aren't popular until later in their existence. The actors of Breaking Bad thought the show could potentially be canceled after the second season - it wasn't until season 3 that it really hit its stride and picked up a massive fan base and became a crowd favorite.

 

OK. But this then becomes unsolvable problem of content companies: is the series XYZ just crap and should be cancelled or is it a diamond in the rough and should be nourished and polished?

 

(BTW, I did not like or watch BB, but as I said my taste is not mainstream. I also don't know if your claim that they hit success in season 3 is right - I think shows don't get to season 3 without success.)

 

Also, less in the way of movies, but another personal anecdote. I thought the first two Harry Potter books were mediocre and not very many of my friends were reading them. It wasn't until the 3rd book came out that my immediate friends and myself really go into the story and the books improved from there. Harry Potter has been one of the best franchises for books/movies and yet, it wasn't especially popular until later in its development as well.

 

I believe this is just an anecdote. HP books were huge success from book 1: http://news.bbc.co.uk/2/hi/entertainment/820885.stm

 

Maybe it was an immediate success in the U.K., but certainly not globally like it has become. I didn't even hear of the books until the second one had long-been released and it wasn't until book 3 that I recall any of my friends reading them...and they had been recommended to us by two kids in our class who came from the U.K. so I'm thinking my group may have been ahead of most in the U.S. Maybe that's my "America centric" point of view, but those books were directly targeted to kids my age and nobody I knew my age even knew of them except the two British twins in my fourth grade class who got them from their grandmother.

 

But yes, they may have been an early enough success in the U.K. not to pull the plug. Maybe it was a poor example given the success in the U.K., but on a global scale, 30k is hardly anything.

 

 

[JayGatsby]

Is netflix truly "creating" content or are they funding/buying it? This would say they're just buying most for it: http://deadline.com/2016/01/john-landgraf-too-much-tv-lemmings-streaming-viewership-data-1201684490/

 

I don't think there's important difference between the two. Do you think there is?

If they're creating the content it would imply to me that they have a superior creative team and a wider moat. I'd also think proprietary content would be cheaper and the returns higher on average than something acquired in a competitive bidding process. If they're able to leverage their distribution network to pay more than others that's still good, but with an increasing number of OTT apps, Amazon, HBO, etc that feels tougher to really achieve the margins that people expect. Same reason I'd pay more for Marvel, Disney / Pixar, etc than I would for a generic studio.

[Jurgis]

Is netflix truly "creating" content or are they funding/buying it? This would say they're just buying most for it: http://deadline.com/2016/01/john-landgraf-too-much-tv-lemmings-streaming-viewership-data-1201684490/

 

I don't think there's important difference between the two. Do you think there is?

If they're creating the content it would imply to me that they have a superior creative team and a wider moat. I'd also think proprietary content would be cheaper and the returns higher on average than something acquired in a competitive bidding process. If they're able to leverage their distribution network to pay more than others that's still good, but with an increasing number of OTT apps, Amazon, HBO, etc that feels tougher to really achieve the margins that people expect. Same reason I'd pay more for Marvel, Disney / Pixar, etc than I would for a generic studio.

 

No, I don't think they have inside-dedicated team. AFAIK, this is not how it works in movie business overall. Pixar and animation might be different, but for movies (and series I think) you pretty much hire people per movie (although there are some parts of teams that are insourced or chunk-outsourced to known entities). You might do contracts for multiple movies with star director or writer, but in general even Disney does it per movie for live action. Even if Disney owns "Star Wars" franchise, it doesn't mean that they have a dedicated team that will work on every "Star Wars" movie (and nothing else). It wouldn't work.

 

Of course, there's even more complications with movie business organization and accounting, but that's likely irrelevant here.

 

Netflix does try to snap up "superior creative teams" for their content. But they are per contract. How well this will work long term is unclear to me.

[dwy000]

The company has a massive tailwind right now and the international expansion should be a great addition of subs.

 

Longer term, I think the business is likely to be squeezed from two sides - especially as they get more and more success:

 

a) Content - other than the proprietary content, the vast (vast) majority of content is the leftovers from the TV and movie studios looking to squeeze every last dollar out of their content before it goes back onto the shelf.  Only now it is becoming the first choice for consumers of that content instead of more profitable channels and is eating the content providers revenue streams.  At some point the content companies will wise up and charge market rates for access to their inventory given it is cannibalizing their other revenue streams.  At that point the cost to Netflix will go way up (see their negotiations with CW network right now) and Netflix will need to significantly increase pricing. 

 

b) access - as it increasingly eats into their cable business and their VOD business, it is only natural for the cablecos to put usage caps on broadband usage (esp since Netflix accounts for like 20% of all broadband usage after 8pm).  As usage costs for Netflix (or any other OTT) goes up, on top of pricing increases above, Netflix stands to get squeezed on both sides.

 

Not to take away from their proprietary content - which is awesome.  I just wonder how much subscribers would pay if that was the majority of content available and the price was substantially higher.

[JayGatsby]

No, I don't think they have inside-dedicated team. AFAIK, this is not how it works in movie business overall. Pixar and animation might be different, but for movies (and series I think) you pretty much hire people per movie (although there are some parts of teams that are insourced or chunk-outsourced to known entities). You might do contracts for multiple movies with star director or writer, but in general even Disney does it per movie for live action. Even if Disney owns "Star Wars" franchise, it doesn't mean that they have a dedicated team that will work on every "Star Wars" movie (and nothing else). It wouldn't work.

 

Of course, there's even more complications with movie business organization and accounting, but that's likely irrelevant here.

 

Netflix does try to snap up "superior creative teams" for their content. But they are per contract. How well this will work long term is unclear to me.

That sounds right. Maybe it's just semantics, but the current dialog around NFLX seems to imply that they're some sort of content creation juggernaut.

[cmlber]

Bought a bigger position in NFLX today. I really like the content they create and their global expansion is just starting. Based on my napkin math they should be able to double the subscriber base in 3-4 years and every additional customer $ goes directly to the bottom line. Even if you believe that they don`t generate profits today, (which i don`t) that means 8 billion $ earnings in 2020. Put a conservative multiple of 15x on it and we are at a 120 billion marketcap company in 4 years. Thats nearly a triple from here. Any flaws in my thinking?

 

I have a very hard time seeing NFLX earning $8 billion in 2020.  HBO earns $1.8 billion pre-tax today and already has roughly 2x as many subscribers worldwide, charges 2x as much per month, has a much better library of exclusive content, and has a huge chunk of new releases tied up for a while allowing it to actually have good movies. 

 

Essentially all the content in the U.S. is owned by six companies.  Do you really think those six companies are going to sit and watch NFLX make $8 billion a year distributing their content?  They'll all have their own apps very soon and then there will be a free or dirt cheap aggregator (probably Apple) that bundles it all together in one NFLX like user interface.

[dorsiacapital]

Is netflix truly "creating" content or are they funding/buying it? This would say they're just buying most for it: http://deadline.com/2016/01/john-landgraf-too-much-tv-lemmings-streaming-viewership-data-1201684490/

 

I don't think there's important difference between the two. Do you think there is?

If they're creating the content it would imply to me that they have a superior creative team and a wider moat. I'd also think proprietary content would be cheaper and the returns higher on average than something acquired in a competitive bidding process. If they're able to leverage their distribution network to pay more than others that's still good, but with an increasing number of OTT apps, Amazon, HBO, etc that feels tougher to really achieve the margins that people expect. Same reason I'd pay more for Marvel, Disney / Pixar, etc than I would for a generic studio.

 

No, I don't think they have inside-dedicated team. AFAIK, this is not how it works in movie business overall. Pixar and animation might be different, but for movies (and series I think) you pretty much hire people per movie (although there are some parts of teams that are insourced or chunk-outsourced to known entities). You might do contracts for multiple movies with star director or writer, but in general even Disney does it per movie for live action. Even if Disney owns "Star Wars" franchise, it doesn't mean that they have a dedicated team that will work on every "Star Wars" movie (and nothing else). It wouldn't work.

 

Of course, there's even more complications with movie business organization and accounting, but that's likely irrelevant here.

 

Netflix does try to snap up "superior creative teams" for their content. But they are per contract. How well this will work long term is unclear to me.

 

Netflix does have an in house team of development executives that choose which writers/directors get the money to make their shows. What distinguishes Netflix (and Amazon Prime) is that the development executives are much more hands off than development executives at other networks (HBO etc.,)

 

In general, writers/directors are not terribly fond of the development process but it (arguably) does serve an important creative function.  The creative freedom that Netflix gives is one of its selling points in getting writers/directors to choose to make their projects with Netflix instead of one of their competitors. (The basic process is a writer/director has an idea for a tv show; the writer/director pitches it to a bunch of different networks, the networks, if they like it, offer them money to make it, the writer/director chooses who to work with).

 

Whether or not creative teams have reliable eyes for "good shows" is a very controversial issue. For example, AMC started off on an incredible run (Mad Men, Breaking Bad, Walking Dead) and then hasn't really had a hit since.  Usually, development execs try to buy certainty either with stars or brands - I do think Netflix's deal with Marvel is very promising. But, an important note, we don't know the terms of that deal. For instance, does Netflix actually "own" Jessica Jones, or does it only have a 3 year exclusive window to air Jessica Jones and the other 3 shows. (For example, Netflix doesn't actually own House of Cards or Orange is the New Black (http://www.theverge.com/2015/4/21/8463743/netflix-ownership-tv-shows) it will have to renegotiate at some future point if it wants to continue to air those shows on its channel.)

 

I do think the risk of competition from the content creators should really, really, really not be underrated.  Could Disney create a "Disney" version of Netflix in 5 years with Marvel shows, Star Wars, all the Disney movies, and other errata? I don't see any reason why not...

 

 

 

[dorsiacapital]

One other point on global growth

 

It's important to remember that "US Netflix" is very different from "Japan Netflix" or any other international Netflix because of content licensing agreements.

 

I think Netflix's recent announcement that it's stepping up VPN blocking efforts (http://www.wired.com/2016/01/vpn-crackdown-wont-affect-subscriber-numbers-netflix-says/) is a very strong sign that content owners are demanding Netflix increase efforts to ensure licensing agreements are actually adhered to.

 

In order to offer a comparable product in other countries, Netflix is going to have to ink new content licensing deals (from an FCF negative position)....

 

This is a very useful list that compares the % of U.S. content available in other countries (http://www.finder.com/netflix-usa-vs-world-content) - many of the big markets (France, Germany, Korea, Japan, India) are all under 35%...