8 to 80 Spotlight: Netflix

By Charlie Bilello

28 Oct 2020

A new series covering companies in the 8 to 80 Portfolio

1) Why is Netflix an 8 to 80 Brand?

Netflix is increasingly becoming a part of every household, and its viewers span multiple generations, from Gen Z to Boomers…

Source: Statista

It is fast becoming a global brand, with international growth outpacing US growth over the past year by a wide margin.

2) What are its growth and financial trends?

Netflix reported 3rd quarter earnings on October 20, 2020.

Revenues were up 22.8% over the last year, the 30th consecutive quarter of >20% year-over-year growth.

Profits also hit a new high during the quarter at $790 million.

Created in YCharts

Free cash flow, which had been negative for years as Netflix invested heavily in new content, reversed course to not only turn positive but hit a new quarterly record ($645 million).

Created in YCharts

Subscribers grew by 2.2 million during the 3rd quarter, a slowdown from the rapid expansion in Q1 and Q2.

Source: CNBC

However, subscribers are still up an impressive 16% year-to-date (with a quarter to go). It goes without saying that the stay-at-home economy has been good for Netflix (less completion from outside the home entertainment).

Netflix Paid Subscribers over time tells the story of continual growth (Millions)…
2020 (Q3): 195
2019: 167
2018: 139
2017: 118
2016: 94
2015: 75
2014: 57
2013: 44
2012: 33
2011: 24
2010: 20
2009: 12
2008: 9.4
2007: 7.5 (first year of streaming content)
2006: 6.3
2005: 4.2
2004: 2.6
2003: 1.5
2002: 0.8
2001: 0.5

3) Was the rise in Netflix widely anticipated?

No. Back in January 2007, Netflix announced a bold plan to bring internet video to television sets. At the time, few believed they would be successful, but such skepticism was nothing new.

The “death” of Netflix was predicted first in late 2002, not long after its IPO. Wal-Mart was entering the DVD-by-mail business, and who could ever compete with the all-powerful Wal-Mart?

In 2006, its “death” was again predicted, when both Apple and Amazon announced plans to start movie-downloading services. Surely Netflix could not survive such a threat.

But survive they did, only to find new doubters after announcing their plans for streaming video. Netflix shares had dropped 12% by mid-January of 2007 and analyst downgrades ensued. The streaming video service would cost Netflix an estimated $40 million in 2007, and such a hefty sum was deemed “too much.”

“There’s clearly a strong demand for watching movies,” said Brian Pitz, an analyst with Banc of America Securities. “But the company’s earnings are going to be more negatively impacted,” said Mr. Pitz, who has a sell recommendation on Netflix shares.

At the time, Netflix’s biggest threat was said to come from (don’t laugh) Blockbuster. Blockbuster’s online rental service was “taking off,” adding over 700,000 subscribers in the prior 2 months.

Blockbuster’s CEO had this to say about their closest competitor: “We have everything that Netflix has, plus the immediate gratification of never having to wait for a movie.”

What happened next?

Just 3 years later, Blockbuster would file for bankruptcy protection while Netflix stock has advanced 15,000% since their streaming video service was announced in January 2007.

Since its IPO in 2002, Netflix is up over 40,000%, an annualized return of over 39%.

Data as of 10/27/20

Netflix’s rapid ascent in recent years seems easy and inevitable in hindsight, but in truth it was anything but.

There were many struggles along the way (see the pair of 75% declines below), and many more doubters than believers.

Created in YCharts

Innovation may be inevitable at the macro level, but at the micro level it is a conscious decision that is fraught with difficulty. For innovation is inherently risky – it must be made with the knowledge that 1) short-term results are likely to suffer and 2) it may take much longer than you think to payoff.

But to maximize long-term growth, and to remain competitive, innovate you must. If you don’t continually disrupt yourself someone else surely will. Innovate or die. That is very much the story of Netflix.

4) What are major risks to future growth?

Netflix faces a number of strong competitors today, including: AmazonPrime Video, Apple TV+, Disney+, Hulu, YouTube, HBO on Demand, and more. To retain current subscribers and continue to add new ones, Netflix will have to continue to innovate and generate content that people want.

From a stock perspective, valuation is the primary concern, as is the case with many tech companies today. Trading at over 9x sales, expectations are high, making Netflix more vulnerable should it fail to meet or beat these expectations.

Created in YCharts

5) Howard’s Take

“Netflix continues to be a buy the dip stock for me in my 8-80 portfolio.

The growth of course can’t possibly keep up with the last 5 years and the competition for attention will keep coming as we have seen even Apple TV release some of my favorite shows of the year.

That said, I still go to Netflix first and it remains Netflix’s war to lose.

Just this week Ellen and I spent eight hours binging on ‘The Queen’s Gambit’ which was fantastic.” – Howard Lindzon

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About the author

Charlie Bilello

Charlie is the founder and CEO of Compound Capital Advisors.

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