One of the biggest errors investors make is zero-sum gaming everything. Like those who spouted the entrance of The Walt Disney Co. (NYSE: DIS) into the streaming competition meant the end of Netflix, Inc. (Nasdaq: NFLX), for instance.
The reason for this is the idea that a market — whether it’s smartphones or subscription video on demand — can only support one company. Investors make this silly bet continuously despite all evidence to the contrary.
Netflix executives reported after the close on Tuesday that 2020 sales reached a record $6.6 billion. Shares surged 12% to a new high. The Los Gatos, Calif.-based media streamer is best of breed.
Yet investors get it wrong … quarter after quarter.
It’s not easy to do the things Netflix managers have accomplished. They built a reliable platform that accounts for 13% of internet traffic, day in and day out. The billing system processes payments all over the world in numerous currencies and reliably keeps tracks of 204 million paying subscribers, up from only 100 million in 2017. And they are doing all of this while continuing to grow and produce content internationally.
That said, Disney offers very formidable competition. The company is a great franchise with enviable brand recognition and capable managers. They even planned ahead by buying BAMTech, the firm that previously ran the broadcast operations for Major League Baseball.
But in the end, even Disney’s best efforts won’t hurt Netflix’s established dominance.
We know this because, despite the competition from the house of mouse, Netflix managers raised subscription prices in 2020, and the firm still managed to add 8.5 million new members in the final quarter of the year. That figure was 2 million more than the consensus estimate, according to FactSet.
Higher subscription fees invariably contributed to the company being cashflow positive for the full year. CEO Reed Hastings said in a letter to shareholders the business was $1.9 billion in the green through the end of 2020, a first.
He noted the better balance sheet could lead to a decision to return cash to shareholders in the form of share repurchases … but it’s not like shareholders should be complaining regardless.
Related Post: Despite a Stumble, Netflix Is Still Winning the Streaming Wars
Netflix has been a super stock in the decade since Hastings spearheaded the transition to streaming from the mail order DVD rental business model it originally had in 2009. At that time, it made no content and subscribers were dependent on the United States postal services.
Shares have advanced an eye-popping 12,000% since then.
Getting the company to cashflow positive is a major accomplishment. It means the longstanding bearish talking point — that Netflix still loses money when its massive programming costs are taken in account — is dead.
Netflix now has the means to pay down the $15 billion its borrowed since 2011.
Ironically, cash burn is a big problem for some of the businesses traders see as would-be Netflix killers. It’s hard to know how long competing SVOD firms such as HBO Max from AT&T Inc. (NYSE: T), Peacock from NBC Universal, Discovery+ from Discovery, Inc. (Nasdaq: DISCA) and Apple TV+, an Apple, Inc. (Nasdaq: AAPL) business, can survive in their current configurations.
Sooner or later, they are likely to succumb to a different model — which could lead to a different opportunity. It would be extremely good news for The Trade Desk, Inc. (Nasdaq: TTD), the programmatic digital advertising platform for all properties not owned by Facebook, Inc. (Nasdaq: FB) and Google.
I have been writing about Trade Desk a lot recently. The stock is in a correction. I believe it is extremely attractive at slightly lower levels.
Related Post: The Trade Desk Enables New Generation of TV
That aside, the Netflix results are a lesson to investors about scale and competitive advantage.
Netflix is wining SVOD because of network effects. People watch a program like “The Queen’s Gambit” and tell a friend. That social aspect keeps subscribers engaged. Members can’t give up their subscriptions because doing so will leave them out of the loop. The greater the number of subscribers, the more valuable the service becomes to those users.
Longer-term investors should buy Netflix and Trade Desk into weakness in order to capitalize on two SVOD plays.
Best wishes,
Jon D. Markman
