In this post, I’ll discuss the quarter, the change in reporting, Netflix’s million dollar question, management’s evasiveness on paid sharing and what inning we really might be in, and what seems to be a material change in management’s posture.
Category Archives: Netflix
More people are now acknowledging that Netflix won the “streaming wars,” but that implies the streaming wars ever happened. It was more of a cold war that never turned hot. In fact, the opposition gave up before it started and began selling its weapons back to Netflix.
In this valuation oriented Netflix post, I’ll discuss a few things:
Netflix’s long-term subscriber and average revenue per member
Why it is hard for management to keep operating margins down
Why Netflix’s long-term margins are higher than most are willing to assume
The recent acceleration of share repurchases and how much of the company management might be able to retire if the stock remains flat
A long-term scenario analysis in with five different outcomes plus a Priced In scenario—a reverse DCF—and corresponding valuations of the business based on those scenarios (a PDF with screenshots for IE subs; the downloadable Excel model for IE with Models subs)
A discussion of why this opportunity exists
It was always a bull case for Netflix that competitive streamers would come around to the realization that streaming on a smaller scale with less robust engagement metrics is a very difficult business.
I posted some mostly qualitative thoughts about Netflix after its first-quarter results (Netflix: To the Victor Go the Spoils). But however competitively advantaged Netflix is, however long their growth runway may be, whatever their long-term margin and cash flow profile might look like, it can all become irrelevant if our expectations are already reflected in the stock. If that’s the case, the company can perform as well as we expect but we still might only earn average returns over time. Or if even higher expectations than ours are already baked in, the company could meet our expectations but the stock can still underperform. That’s the disaster we’re trying to avoid.
As for the quarter itself, there wasn’t much surprising. Revenue was as expected, margins were a bit better, and free cash flow of $2.1 billion is starting to ramp. I could go through all the metrics for these 90 days but frankly, whether revenue growth or margins came in 100 bps better or worse than expected or quarterly EPS beat or missed is really not that relevant for long-term shareholders. What is relevant are any new data points or learnings that provide greater clarity or confidence into the extent to which Netflix can live up to its long-term potential as the global SVOD leader and how that will translate into free cash flow over time. From that perspective, here is what I found important.
Netflix is getting harder to value. I don’t mean the process is more difficult than it used to be. I mean the range of upside outcomes is becoming wider. It has always been hard to be precise but that is getting even harder.
The headlines focused on Reed Hastings stepping down as co-CEO. That is understandable. Certainly, he is a business legend, having co-founded a DVD-by-mail startup, vanquished larger competitors, pivoted the business twice, first by pioneering into streaming and later into original content. Netflix now dominates the field with $32 billion of global streaming revenue from over 321 million global household users, including 231 million who are currently paying for it.
Some thoughts about Netflix after its second quarter results
Some thoughts on Netflix’s ad-supported opportunity