Netflix isn't just a streaming service; it's an empire. But how does it fare when thrown into the arena with Disney, Hulu, Amazon Prime, and the others?
Clem and Steve tear apart the streaming service battlefield to reveal Netflix's tactics for maintaining its lead, boasting a mighty 260 million subscribers worldwide. We're not just talking numbers; we take you behind the scenes of Netflix's international content and marketing strategy—could this be the secret weapon that gives the platform its edge?
Financially, Netflix has a strong net income margin and impressive free cash flow. And it has impressive growth. We hold back on the tough questions: Is Netflix's valuation a reflection of its worth, or is it an overpriced ticket to the investing show?
Netflix isn't just a streaming service; it's an empire. But how does it fare when thrown into the arena with Disney, Hulu, Amazon Prime, and the others?
Clem and Steve tear apart the streaming service battlefield to reveal Netflix's tactics for maintaining its lead, boasting a mighty 260 million subscribers worldwide. We're not just talking numbers; we take you behind the scenes of Netflix's international content and marketing strategy—could this be the secret weapon that gives the platform its edge?
Financially, Netflix has a strong net income margin and impressive free cash flow. And it has impressive growth. We hold back on the tough questions: Is Netflix's valuation a reflection of its worth, or is it an overpriced ticket to the investing show?
Straight Talk for All - Nonsense for None
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Steve Davenport:
Welcome to Skeptics Guide to Investing. In previous episodes, Clem and I have discussed Nvidia, Apple, Microsoft and Tesla. In this broadcast, we're going to discuss streaming service Netflix. Back when we had FANG as an acronym, Netflix was the end. Now Netflix isn't in the magnificent seven. Clem, I know you hold Netflix in your portfolio and I suspect many of our listeners subscribe to multiple streaming services, for example, Disney, Prime or possibly YouTube Premium. Do you think Netflix's streaming position is superior to these platforms?
Clem Miller:
Let me start off by saying that I recently read that the average household in the United States subscribes to 2.9 streaming services. Obviously, it's not a question of picking one over others, so you're not going to have a situation in general where somebody picks Netflix over perhaps one of these others. But it's interesting to look at the stats. So Netflix has 260 million subscribers worldwide, which is a bit more than the combination of Disney, hulu and ESPN Prime. They have 225 million, whereas the combination of Amazon Prime, mgm Plus, has 205 million. So they're all sort of, even though Netflix is ahead of the other two. They're all sort of the dominant oligopoly. But it doesn't stop there. Youtube Premium has 100 million, max Plus and Discovery have 98 million. Paramount Global has 68 million. So, the way I look at it, you have these different streaming services that offer somewhat different packages and sort of niches. You know if they're maybe sports or Star Wars or Star Trek or things of that nature, whether they have old TV series that they're streaming. So you just have or new programming, new content.
Steve Davenport:
And. I've noticed that on Netflix. I tend to get these movies and I don't know the actors and I look and then it ends up being in subtitles or voiceover yeah, really kind of annoying, because you can tell that they aren't saying the words , there's a little delay, or I just would have thought that by now, where we could create AI images, we'd be able to over dub a little better.
Clem Miller:
Well, that's an interesting point, which brings me to another. I think a positive about Netflix, even though you know, even despite what you're saying, I think Netflix has done a much better job than the others of becoming a global streaming service.
Clem Miller:
So they generate content all over the world and, on top of that, they sell content all over the world. I talked to some friends who live overseas and they watch Netflix just like we watch Netflix here in the United States. So it's a global service and, with 260 million, I think there's a long runway ahead for Netflix being able to generate new subscriber growth.
Steve Davenport:
Yeah, I've enjoyed watching some Irish shows Derry Girls, Bad Sister and some other ones and I kind of enjoy the highlights and the way they do the cinematography is slightly different than in the US, so I kind of like them, switching it up every now and then and watching another series from another country. Do you think that Netflix taps into that global market better than everyone else?
Clem Miller:
Yeah, I think it certainly does. As I was mentioning, I do have friends overseas who watch Netflix and I know a lot of the content on Netflix a good chunk of it anyway is made overseas and I think Netflix has a good cultural sensitivity that maybe some of the other networks who focus on US niches might have less of.
Steve Davenport:
So I guess you'd argue that, despite the competition, netflix has a wide moat.
Steve Davenport:
How does the moat translate into profitability and cash flow.
Clem Miller:
Yeah. So the net income margin, which is the net income or net profit divided by revenues, is a pretty strong 16%. The return on equity associated with that is 26%, which is really high, really strong and a really amazing cash flow generation. Free cash flow margin is 57%. That is, for every dollar of revenue they generate, they produce 57 cents of cash flow that can be rolled back into the business or used to pay down to redeem shares. It's really a strong cash flow generating business.
Steve Davenport:
So companies with strong cash flows and revenues are usually expensive. I see that Netflix 2024 PE is 35. It's not outrageous compared to some of the names, but it's still high. How do you classify it as being expensive, reasonable or cheap.
Clem Miller:
So first of all, before we get into those value numbers, let me just say on growth, it generates 11% revenue growth annualized over the last three years. That's really strong and 26% earnings growth earnings per share growth so that's pretty strong. Which leads me to my point about valuation. Now it may well be that in 2024, the PE ratio is 35, 36 times. Because of that growth rate, that PE ratio comes down over time. So in 2025, it's 29 times 2026, it's 24 times 2027, it's 21 times. So that makes going out into the future. That makes PE certainly not unattractive. I'd say that Netflix is a bit expensive, but it's not terribly expensive compared to some of the magnificent seven companies, some of the semiconductor stocks, so it's not unattractive on a price. I'll also say that the PEG ratio, which only looks at the next year of growth, divides the PE for next year divided by the next year of growth is 1.2 times. So that's actually pretty attractive.
Steve Davenport:
So do you think they're going to be able to sustain this, though, and get into those numbers? I mean, when we talk about 2027, that seems like a long time away in terms of being able to predict when companies can't hit numbers one quarter away sometimes.
Clem Miller:
Yeah, I mean it's. You know there's always a lot of variation in this, but this is based on, you know, analyst expectations over a period, long period of time. Analysts can be wrong, sometimes they are wrong, but you know, I'm giving you what the what the expectations are, and that's you know. That's better than just guessing, right?
Steve Davenport:
Yeah, it's good to have something, so you use Glassdoor employee satisfaction ratings as a proxy for company quality. How does Netflix fare on that? Do people like it there?
Clem Miller:
Yeah, I mean. Glassdoor has a 4.2 out of 5 rating. Anything above 4 indicates very satisfied employees. So yeah, I mean Glassdoor. Glassdoor rating indicates that employees are very satisfied. That's a high quality indication.
Steve Davenport:
So one thing I was thinking about when we talked about doing this podcast was is our lifestyle really changed when we went through COVID? So my wife and I and this is just between you and me, clem, but we started to watch.
Clem Miller:
Love is Blind, you and me and everybody listening to this podcast.
Steve Davenport:
Okay, so my son was home and he said why don't we watch Love is Blind, the latest season, and we thought this is really not something we wanna watch, but if we get to spend time with our son we make an exception. And now we've gone back and watched the prior four seasons and we're opening up the fifth season and we're feeling like there's something very comforting about going on a binge streaming and it reminds me of the times during COVID when you just felt like you had to stay put and you just kind of relaxed and, you know, allowed yourself some time to just get away. Do you think that we're gonna see people ever change this kind of binging on streams of shows, or are they noticing any activity where people are getting back to normal? Or do you think we're at the new normal for people streaming and demand for streaming? Because it seems to me that if everybody started to exercise more and do more things, the area that would hurt would be the streaming time.
Clem Miller:
Well, obviously I can speak from my own experience more so than about experiences in general. My COVID experience was, yeah, I mean, we watched a lot more streaming on TV, but I also, during that period of time, got a lot of exercise that, because you couldn't go inside, you had to. You know, if you wanted to exercise can't go to the gym, you'd have to walk around outside. So I don't think that there's necessarily a, it's not necessarily exercise versus streaming. You can do both. I think that you know the experience of the whole Barbenheimer, barbie and Oppenheimer going to the theaters and so on.
Clem Miller:
This summer, you know a lot of people were saying, well, the theaters are back. Honestly, I don't think they're back. I think that was, I think, those two movies coming out the same weekend. That was an exception. That proves the rule that the theater industry is going out. You may disagree, maybe others disagree, but I think the future well, the present and continuing into the future is more streaming and less going to theaters. I'll also say that I think that you know the biggest potential threat out there to the streaming services doesn't really come from other streaming services or from theaters. It comes from YouTube, because a lot of people watch YouTube and there's a lot of content there, including some really high quality content that people are watching what Our contents there?
Clem Miller:
Yeah, our contents there. No, it's pretty high quality. Yeah, I'd say so. But you know, there's a lot of high quality stuff on YouTube and I spend personally, I spend a lot more time watching YouTube than I do on streaming services. That's not necessarily true for other people, but for me it's. You know, I find, you know, a very high quality degree of content on YouTube.
Steve Davenport:
Well, yeah, I think the TikTok also, when I don't know how or if you have an opinion about TikTok being banned, but it feels to me like there are other substitutes for streaming and they better watch out, because I think that a lot of these services, like YouTube, are only going to get bigger and they seem to. Their growth is just tremendous in terms of what they're producing. How do you feel about TikTok?
Clem Miller:
Well, so there's two issues with TikTok. One is that, unless they move to a longer format, I think that its prospects are fairly limited. A lot of people may disagree with that, but if you have very short videos, yeah, they can be interesting, yeah, they can be addictive, but on the other hand, how far can that go? Would be my question. Second thing is obviously the geopolitical aspect of it and concerns about whether TikTok, like Huawei and other things that emanate from China, whether there's a Trojan horse yeah, it's a Trojan horse, or that may be a good way to describe it or whether there is data collection that we don't know about or whatnot. I don't really know if that actually can be resolved by changing ownership of TikTok. As long as somehow the Chinese companies or the Chinese government is in that mix, I don't know how you can potentially resolve that. I really don't see US-China relations improving. It's really the only thing that the Biden administration and the Trump people actually agree on. I just don't see that changing.
Steve Davenport:
Yeah, so one of the last items of your analysis is usually about short-seller interest. How does Netflix have an acceptable short-interest ratio?
Clem Miller:
Yeah, it's 1.84%, which is it's not as low as some of the other Magnificent Seven or some other companies, but it's certainly very comfortable. It's not anything to be concerned about.
Steve Davenport:
So let's look at the mailbag. So the question is whether we hold Amazon and Disney in addition to Netflix.
Clem Miller:
Clem do you, I Do not hold Disney Because it doesn't meet my quantitative criteria. I do hold Amazon, but it's not, you know it's not because of Amazon Prime and the streaming and whatnot. It's because of the overall company, including you know it's AWS Cloud services, including it's. You know it's delivery capacity, you know it's a. It's a strong company. So I, I hold it. So you know, if you look at the magnificent seven Companies, I hold Amazon, I hold meta, I hold Microsoft and I hold Nvidia, but I do not hold Tesla and I don't hold what's the other one? I'm missing Steve. I'm being like an American politician forgetting. No, I do hold Google. Okay, I do hold alphabet, I do.
Steve Davenport:
I've uh, you know we don't hold Tesla, we don't hold meta anymore. We did it one time and so all the others we do hold. So I agree, it's it. It's hard not to be a part of them, but because we're equal weighted, we don't hold nearly what the market holds in a case like Nvidia. So we're we're far underweight and you know when you look at some of these names and what they've done. I mean, nvidia is now almost 30% of the semiconductor index. Yeah, it's crazy, which I think is. You know, when you get to that point, you're basically dominating a Lot of different spaces.
Clem Miller:
So, yeah, nvidia, I've had to keep trimming back. Metta I've had to trim back as well because it was doing it was really on a hot roll for a while, I think on an alphabet Google they've had. I think there's an opportunity there for actually buying some more, because they kind of stumbled with with some of their AI product. I don't know if you noticed that recently.
Steve Davenport:
Yep, they're named that. We added a couple of places, so Everybody thanks for listening to our podcast. If you like our podcast, please give us a like and subscribe to be notified about future episodes. And Thanks for listening. Clem, do you have anything else?
Clem Miller:
Nope, that's it. It was a really great Opportunity to talk to you and to everybody.