Circa: March 2021. Due diligence and an inside look on Netflix, the streaming giant of our decade.
Welcome to the first episode of behind the ticker, a series which provides quick educational narratives about different companies for everyone, including myself to gain a deeper understanding about the companies beyond just their ticker symbols. As Peter Lynch once said that it’s important in investing that we remember that stocks are not lottery tickets, so it’s crucial for us to find out more about them before even buying any shares. Knowing the fundamentals of these companies, and if they hasn’t changed during overall market downturns, will help us build conviction to take advantage of opportunities during market corrections.
“An important key to investing is to remember that stocks are not lottery tickets.” — Peter Lynch.
Moats
1| An ever-expanding broad-based international original content
In the world of entertainment, content is king. Netflix’s content spans across a wide variety of genres (anime, drama, action) and locally tailored shows (Lupin, Money Heist, Dark), giving them a huge edge in attracting audiences and establishing fans globally.
Original content from Netflix fosters a strong brand association, especially more so, when Netflix emerges as big winners in the Golden Globes awards. Not only was The Queen’s Gambit named the best television limited series, it also reignited global interest in the game of chess, in the first 3 weeks of its debut, sales of chess sets went up 87% in the United States, and sales of books about chess leaped 600%. This indicates the strength of influence that Netflix has over its audiences, and how effectively their content can translate into real consumer patterns.
With plans to release 1 new original film every week in 2021, far exceeding any other competitors’ commitment.
2| Single-minded focus
Being a pure streaming play does come with the benefit to have extreme focus towards innovation and content creation. Allowing them to invest heavily into original content to compete with other rivals such as Disney, WarnerMedia, Discovery, Apple and Amazon.
Is it unlikely that large competitors like Apple & Amazon with other highly lucrative streams of business operations , would be ready to commit significant invesments to scale up content production at the same level as Netflix because it will take years before the economics and return on investments on content acquisition/creation to be as advantageous as Netflix.
For streaming competitors, the cost of production or licensing of content isn’t going to be significantly lower than Netflix unless they’ve a powerful existing IP to tap on (i.e. Disney).
Other media providers are also cannibalizing their own cable businesses while switching over to streaming business model.
3| Virtuous Growth Cycle: Subscriber to Content
With a subscription model, Netflix makes money by charging its audiences to watch content on its platform. Each new subscriber acquisiton will bring in additional recurring revenue for Netflix. Netflix will then use this additional revenue to invest in producing or licensing more content. This substantial increase in the content on the platform over time, makes Netflix more valuable for its users, thereby attracting more new users and make existing users stick around. More users equals more revenue, which in turn generates even more content.
4| Virtuous Growth Cycle: Subscriber to Content Creator
With a large number of subscriptions, it makes it easier for Netflix to convince both content producers and talent to sign exclusive deals for their original content on the platform. With more additional original content attracting new users, this will further increase the leverage of Netflix to capture even more talent and content producers to sign multi-year exclusive contracts.
Ending
The streaming landscape over the next decade will by no means be easy for Netflix to remain at the top, with strong rivals at its heels. However, its first mover advantage and strong moats against its rivals, makes it extremely hard to bet against them.
