062: I’m Back!

Table of Contents

1. Hello Wonderful Members
2. Netflix Overview
3. Major Omissions
4. Front of Mind Questions

1. Getting There

Dear wonderful members, 

I am still alive! It’s been rough. Thank you for sticking with me as a member here at The Invested Practice. It means a great deal, to me, truly. Thank you.

I will share with you more about where I’ve been, but right now, I do not want to lose this opportunity, today, to share investing practice with you. 

I want to send you the first piece of investing work I’ve done in many months. I managed to do a light bit of research into the background of Netflix today, and have included below a written version of what I spoke on my podcast, as well as some additional thoughts with you.

The below is rough (I dictated it, so please forgive the computer for its typos), but it’s just about getting the information across. I quickly researched the background of Netflix, as I usually do with a company, from founding to early stage, to IPO, and then some quick facts about the company now. Some questions and comments are at the end.

Many of you have asked me how I start working on a company – this is how. 

2. Netflix Overview

Symbol: NFLX

Stock exchange NASDAQ

Home country: USA, in California

Market cap $87 billion

Currency of stock and financial reports: US dollar

Year founded: 1997

Created by: American entrepreneurs Reed Hastings and Mark Randolph

Original business: video DVDs by mail, directly competing with Blockbuster, a huge chain of video stores, and a lot of local and smaller chain video rentals 

Early business: They weren’t doing great during the dot-com crash, and Hastings and Randolph tried to sell the company to Blockbuster for $50 million. Blockbuster declined. One of the great stupid business decisions. 

As most startups did, they needed to go public to raise money, and they had planned to go public right around when the September 11, 2001 attacks happened so they pushed back their plans for an IPO and ended up going public in May 2002. At $15 per share. They were not profitable at the time.

So, we are just about at the 20 year anniversary of their being publicly traded. That’s right – Netflix has been public for 20 years.

They were still a tiny baby back then though, they hadn’t even introduced streaming.

Their competitors at the time were video stores and then blockbuster opened up its own DVD by mail service. However Netflix focused on an algorithm that would predict what users ratings of movies were. They even suggested movies to their members that probably the members have not even heard of. So from the very beginning Netflix was focused on adding value to the users experience of entertainment.

In 2007 they started streaming. Internet speeds were still quite slow so there wasn’t a lot that they could stream and it took a long time for it to download but YouTube started coming up and they started looking towards streaming 

To offer streaming, unlike video rentals, they needed licensing from the major movie companies and then from television.

2012-2013 they started going international and starting to produce their own series and that pretty much takes us to the Netflix we know now.

Mission is “we want to entertain the world”.

This page has the Mission and a nice timeline of their history. 

Free cash flow is negative for years.

Debt is 14-16 billion.

3. Major Omissions

I have NOT mentioned and did not mention on the podcast the current stock price, anything that’s happening with the stock, or current market views of Netflix. I don’t care. The opinions of others are very useful, but only once I have my own knowledge about a company and can use the knowledge and opinions of others to find the holes, and maybe fill them in, in my research.

The annual meeting is this Thursday June 2nd at 3 p.m. Pacific time. Their Annual Report has the link. I’m sure it’s on other pages too, but that’s the one I found it on.

4. Front of Mind Questions

Questions front of my mind about Netflix: 

It seems like the entire world of entertainment is the competitor of Netflix. Furthermore, a lot of that world of entertainment is already consolidated into major entertainment companies with many arms in television movies gaming, Etc. Plus, those conglomerates have many many years of content behind them on which they can lean for their own streaming services and create synergies between them. These companies can afford to lose money on building their streaming service for some years. How can Netflix compete against companies with massively deep pockets, which can run losses for years on their streaming in order to gain market share – and on which Netflix depends for content? 

Does the future of Netflix lean more towards original Netflix shows? Or will they continue to have access to shows from other companies? 

At what stock price does Netflix become vulnerable to a takeover – i.e., at what point does their debt become a real problem? Raising money becomes hard….

Gaming. Netflix has acquired gaming companies. They mention gaming in their mission statement. Maybe that’s an edge in the future? 

Account sharing / user experience. In my opinion, badly done and a real opportunity missed so far. Maybe that will change in the future. But their whole thing is user experience, and yet they’re now getting headlines about cracking down on people using Netflix for free or sharing Netflix and that just turned everybody off. There’s so much free content out there. Why should I pay for Netflix if they’re being annoying? Instead of going in that direction, they could have so easily focused on creating a better user experience, such that you get a lot for having your own account. It’s the carrot versus the stick, and I think the carrot is much better used in this situation. For example, my husband and I share an account that can have multiple screens, and we pay a little bit extra for that every month. But, the account doesn’t reflect that it is shared. So all the suggested shows are confused between what my husband watches and what I watch. They could do much better by going back to their roots and having a great user experience by offering individual accounts for show suggestions that are really personalized. It feels to me a bit like they’ve lost their way. Lost their identity. Very common in mature companies that are struggling with competition. Can they reset?

I’m still not totally convinced Netflix has a sticky, intrinsic moat. It’s SO easy to cancel. People said newspapers had a moat too and… We saw how easy it is to stop buying those. The argument is “the best content.” But does it have the best content? Will it have the best content in 5 years? Will it have the best content in 10 years?

When do its rights to major shows run out? Marvel? NBC shows: The Office, Parks and Rec, Seinfeld? Are there any major movie studios or television production that have deals with Netflix AND plan to continue having deals with Netflix? Or are they all pulling away for their own streaming services?

Stopping there. I need a break. Again, I will share with you what’s been going on, and that’s soon on my list of priorities, but I’m glad this opportunity came up today. Voice dictation FTW. Investing practice feels so freaking good. 

xx Danielle