8 to 80 Spotlight: Netflix (1/20/21)

By Charlie Bilello

20 Jan 2021

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 has also become 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 January 19, 2020.

Some of the highlights:

  • Revenues were up 21.5% over the last year, the 31st consecutive quarter of >20% year-over-year growth.
Data via YCharts
  • Over the past 10 years, Netflix revenues have increased by over 10x, from $2.2 billion to $25 billion.
  • Profits in 2020 hit $2.76 billion, a 48% increase over 2019.
Data via YCharts
  • Free cash flow, which had been negative for many years as Netflix invested heavily in new content, reversed course to not only turn positive but hit a new annual high in 2020 ($1.9 billion).
  • In their shareholder letter, Netflix stated that they are “very close to being sustainably free cash flow positive,” and that they believe they will “no longer need to raise external financing for day-to-day operations (source).” As they generate excess cash going forward, Netflix said they will “explore returning cash to shareholders through ongoing stock buybacks” as they did in the past (2007-2011).
  • Paid subscribers increased by 8.5 million during the 4th quarter, capping off a tremendous year of growth and beating expectations by a wide margin (6.47 million expected).
Source: CNBC
  • Subscribers grew 22% in 2020, up from 20% in 2019 and 18% in 2018. It goes without saying that the stay-at-home economy has been good for Netflix, with more time spent at home and less competition from outside the home entertainment.

Netflix Paid Subscribers over time tells the story of continual growth (Millions)…
2020: 204
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

  • Netflix is increasingly becoming a global brand, with international subscribers now totaling 130 million versus 74 million in the US and Canada.
  • Netflix had a huge year in creating content that resonated with viewers, with its series “accounting for 9 out of the top 10 most searched shows globally in 2020” and “2 of the top 10” most searched films. 62 million households watched “The Queen’s Gambit” in its first 28 days, making it the biggest limited series in Netflix history.

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 1/20/21

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.

Powered by 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.

Netflix’s thoughts on competition from their recent shareholder letter

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

“I continue to believe that Netflix has pricing power in the years ahead.

Today everything is a subscription and that is getting expensive for a large portfolio of America.  Netflix though is like Disney in that it’s part of the culture of the country and the home page for hundreds of millions at the end of their day.

Netflix could easily launch premium services for verticals and documentaries and live events…the opportunities for monetizing the upper middle class around the world are endless.” – Howard Lindzon

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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.

About the author

Charlie Bilello

Charlie is the founder and CEO of Compound Capital Advisors.

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