Our 7investing team is all about showing the transparency of our investing process. We hold Team Calls each month, for our advisors to get together to discuss the opportunities and the risks that face each of our investment recommendations. We provide these calls every month for our paying 7investing subscribers, as a complement to our official recommendation reports.

Today, we’re giving a sneak-peek into how our process looks. Our team recently hosting a “Mock Team Call” for Netflix. In this, we described the streaming company’s vast international opportunities, its excellent execution, and the looming risks of competition.

If you are interested in Netflix as an investment, this video will provide you with several important factors to consider. Please note that Netflix is not an official 7investing recommendation, and this video is intended only to illustrate our Team Call process.

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Timestamps

00:00 – Introduction

02:21 – Overview of Netflix

03:21 – How Has Netflix Adapted as Technology Has Evolved?

07:54 – How Does Netflix Make Money?

11:21 – Potential Revenue Growth

15:37 – Competitive Landscape and Valuation

25:13 – Questions and Discussions from the 7investing Team

Transcript

Simon Erickson  0:09

Hello everyone and welcome to 7investing’s mock team deep dive call today. I’m 7investing founder and CEO Simon Erickson. Every month at 7investing each of our seven lead advisors presents their top stock market opportunity. We write reports and release those on the first of the month. But in addition to the written reports, our team also has team calls, where we pitch the idea to our fellow advisors and talk about the opportunities and the risks for each of the recommendations. In today’s video, we’ll be doing a mock team call about Netflix (NASDAQ: NFLX), which will be pitched by our 7investing lead advisors Anirban Mahanti and Dan Kline, with the rest of our team pitching in with our own questions in a Q&A session.

A reminder and disclaimer that this is not an official recommendation of 7investing this month. This is simply illustrative to show how our team calls go. So with that in mind, Anirban and Dan, I will hand the floor over to you to pitch Netflix as our mock team call for this one.

Anirban Mahanti  1:14

Thank you, Simon, I want to start and then I’ll be just handing it over to my colleague, Dan whenever I’m doing the slides at various points in time, because we made different points of the slide. Just do it just to bring the team’s perspective instead of it just being my show or Dan’s show.

So let me just fire up share screen. Yep. Okay.

All right. We’re going to talk about a company called Netflix. Look, everybody knows about this company. But we’re going to show you how we present and talk about companies that we recommend. This is again, a mock mock presentation.

All right. So this is a mock presentation for 2021 being presented by myself and Dan Kline.

So, just to gives you an overview of the company.  It is described as consumer discretionary company. Risk levels, medium. Investment has growth.  This is a large cap or if you prefer, you can call it a mega cap.

What does Netflix do? Well, everybody knows what this but Netflix is a leading video streaming platform with over 200 million paid subscribers. And a couple of cool facts here. Hastings or Reed Hastings, who is a co-founder of Netflix, invested $2.5 million cash. I believe this was cash that he had from a previous business that he had founded and sold. Co-founder Hastings and Randolph had actually tried to sell this business to Blockbuster (before it went bust) in September 2000 for $50 million. This is a company with about a $200 billion market cap right now. So I think that that was something that they missed out on. Alrighty.

Okay, so what I’m going to try to do is I’m going to give you a bit of, I’m going to set the stage of why we think it’s an interesting company to look at. And I’m going to talk about this stuff from a bit bit of a historic perspective. I’m going to add my own perspective here, because this is an area I had worked on, when I was doing my own PhD in the early 2000’s.

Okay, so Hastings and Randolph founded this company Netflix in August 1997. It started as a website for choosing which DVDs you want to borrow. And the basic idea was that if you went to a shop, you could rent it, you might have a late fee and stuff you might forget. This is a story that actually, Reed Hastings used a lot [inaudible], the late fee that he had, from some video that he had rented was sort of the motivation for starting Netflix.

Well, apparently, that is a made up story. But still, the idea is cool that you can borrow as many videos, well, you can put a certain number of videos, tapes, or DVDs at a time, you can keep them as long as you want to. When you return them, you can get the next one in your queue. And this was a pretty fantastic idea at that time, remember, it’s 1997, so long time back.

The thing to remember that time though, and this is why the report on the internet was really slow. This is the time when people log into America Online, broadband was slow. We used to call the internet “World Wide Wait”, took a while to just log on to the internet. So clearly, something like streaming wasn’t really invented. It doesn’t mean that people actually did not work on streaming and the reason I’m pointing this out is well, sometimes what happens is the ideas might not be new. Right? So Time Warner actually ran a video streaming trial.  A proper video streaming trial in 1994, in Orlando, and then basically by 1997 decided, well, this is not a feasible business model, they actually put cables. They had, broadband access and everything to do this, but they figured this doesn’t scale and doesn’t work. Video has always been thought of as the killer app.

So one thing that happened over time is overtime, basically, internet connectivity increased. This is bandwidth scaling. Some people refer to this as the Nielsen’s law. And this is one of the big drivers alongside other things, faster computers, faster chips, the cloud storage, etc. More and more people being available on the internet really made streaming happen.

But there was something else that happened at the same time, which is YouTube, right? So YouTube happened around 2005, they had scaling challenges got acquired by Google, probably one of the best acquisitions Google has made, it was only for $1.65 billion, right? The reason I’m pointing this out is Netflix Watch Now, which is what is on-demand streaming, did not launch until 2007. And when it launched in 2007, they just had 1000 titles out of the 70,000 strong physical library. So again, the company is an old company which has evolved over time.

So the reason for pointing this out. This is an extremely innovative company. And if you think about its journey from when it started, right, it got into digital rights, it got digital rights, for content. This was sort of its early game, taking other people’s content and broadcasting it or making it available on demand. Then they figured that well, this thing is not just a US-Canada thing, it can actually expand beyond the North American horizon and go international. International happened in 2010.

Before other people figured out that they can also get into streaming and therefore not give their content to Netflix, these guys figured out that we need to do original content. So people remember House of Cards and other things. Well, that was original content. These guys always innovate. So they did interactive content, this is something I’ve worked on. Interactive content is an interesting area, which will become even more interesting, I guess, going forward if we have AR and VR. And that was 2017.

So interactive content is not just for, the most of the encrypted content that they have is for children, but then you can have, choose your own ending and things like that. And gaming in the context of streaming has been announced for 2021. So I think Netflix is moto has always been experiment, right? And that is really really cool.

How does it make money? Via subscriptions, buy a subscription adding to subscribers, and it’s got 200 million plus subscribers. Spends on a wide array of content and tries to have must watch shows. What we mean by that is really you want to create shows that drive audience and create subscriber growth. I’m going to turn it over for the content part to my colleague Dan, over to you.

Dan Kline  8:16

Thank you Anirban. They have a massive amount of content. Roughly 36,000 hours of content. Simon start watching now tell me when you’re done. They have a number of namebrand shows, Orange is the New Black, Ozark, Stranger Things, Blood Line, The Witcher. You know what all of those have in common, I haven’t watched any of them. But my wife has watched almost all of them. They have reality shows that are evergreen Love is Blind, The Floor is Lava. What kid hasn’t played The The Floor is Lava? They have a ton of kids and family content. Why is that important? Because as we’ve seen with the Disney catalog, it ages really well, Pepe Le Pew aside, but in general, that content, a new group of kids come in, they can watch it.

They have a global footprint. They have originals from not all of the 190 countries that they’re operating in. But for all of the regions they’re operating in. So they have distinctive content for those markets. They also licensed content to air in different markets. So maybe there’s a show that’s very popular on Australian television and Netflix licenses for use in the US. There previously had not been very much market for that. But there have actually been a lot of hits by Netflix standard shows that they didn’t produce that they licensed for relatively little money.

If you can get the next slide that’d be appreciated.

They’re spending $17 billion on content in 2021. They’re spending more money than Disney spent to buy Lucasfilm, Pixar and Marvel, that is a lot of money. They spent $11.8 billion in 2020. It was a bit slow because of the pandemic. $13.9 billion in 2019. That does create a moat that pretty much only Disney can come anywhere close to. This is a volume over everything strategy. They certainly have some quality, but they use an algorithm that tells them exactly how much money to spend on say an Adam Sandler movie or dear God, even worse, a David Spade movie, and they know it’s gonna hit this many eyeballs. It is not the same metric of hits, as other people use but it works for them.

As I said earlier, they operate at 190 countries, and they create content for those audiences. That can be everything from localizing, which is taking, an English language show and putting it into the local language to actually creating versions of a show or original shows for that market. This is very hard to duplicate, as I said at this at the top. Next slide, please.

Their revenue growth has been outstanding, Anirban this one was actually yours I think if you want to jump in

Anirban Mahanti  10:41

No, no you can continue that’s fine.

Dan Kline  10:44

I mean, I don’t know what else to say here. This is a straight line mountain going up. It’s been quick. And it continues. They add subscribers, they’ve been able to raise prices, they have not done a ton with licensing, which is something they might be able to do more of. You’ve seen a little bit with some Stranger Things clothing and lunchboxes, and a horror house at Universal Studios during their their annual Halloween Horror event. But there’s a lot of potential revenue growth to come. And next slide, please.

This is one where, why don’t you speak to Anirban because I think you understand this better that I do.

Anirban Mahanti  11:23

Yeah, so with the previous slide, one of the things I’ll add is, over the long term for companies, a company’s share price typically follow the growth of gross profit, or the growth in revenue over the long term. So if you can have the exponential curve, then you basically get exponential returns.

Operating leverage, this is an interesting one. So on an operating basis, if you think about EBITDA, earnings before interest, tax, depreciation and amortization, they have been getting a ton of operating leverage. This kind of makes sense, because you know you build out a catalogue. And you of course, you’re building out your catalog, but remember, your built catalog is already an instrument for driving subscribers in new markets, right.

So people who have not seen Orange is the New Black. If you launch it, when Netflix goes to a new market, or pushes into a new market, that is a carrot that they can use, right. And they get into new markets in different ways. So they go to India, they have subscription plans, for example, that are tailored towards mobile-only users that are very, very different price point. So beautifully scaling here, expected to hit about 20% operating margin in 2021. So that’s, really good. So on an operating basis this is a profitable company. Sorry do you want to go ahead?

Dan Kline  12:44

I just wanted to jump in and say it’s cheaper to translate a show than it is to create a show. So once you’ve invested in a show, to bring it into a new language to a new market does not cost you, even fractionally the hundreds of millions it can cost to create a high production value show.

Anirban Mahanti  13:00

Exactly. In some ways, you can say the show is like software, right? Once you’ve made the show, you can kind of milk it for its life.

So, one reason to consider buying this stock is, it might appear they have 200 million subscribers. There’s ton of competition now in this space, as you can see from this, this long list of names there. And that suggests that maybe most of the good things have happened. Maybe the really exponential growth has happened. But you could still look at this as a share of US T.V. time. This is still small, right? Netflix is leading, but it’s still small. There’s a lot of opportunity to win here. And still cable is 40%, that can shrink over time.

The other thing I’ll point out is there’s other ways to think about this.  So 200 million subscribers. Think of that as 200 million eyeballs. Compare that with the population of the earth. Divide that by, say, four to set number of households. That’s really the target market, the target market for this sort of thing is the world at the right price point. And if Facebook (NASDAQ: FB) can have 2 billion people, and Apple (NASDAQ: AAPL) can have a billion devices. And you can think there’s probably a billion subscribers, and you could get to that scale eventually. So that is a long runway in that sense. I’ll pass it over to Dan, for this one.

Dan Kline  14:27

Yeah, so this is the board and the management. Reed Hastings is the founder and CEO. He has been there since day one and he’s shown an ability to come back from mistakes. If you remember Qwikster was an attempt to spin off the DVD business and that did not go well. And he walked it back. He said it was a mistake. And his co-CEO is a gentleman named Ted Sarandos, this was an interesting one, because he was the Chief Content Officer. He remains the Chief Content Officer. He used to be the boss at E, he’s run a lot of different places. And they didn’t really talk about why he was made co-CEO but I have to assume you had an offer to go be a CEO somewhere and they wanted to keep him on board.

He’s very important for talent relations and sort of has those deep standing, sort of the traditional experience, Netflix may not make shows in entirely the traditional way. But you still have to have those phone numbers.

Senior management has been around for a long time, much of top management has at least six years with the company, they have a few who they pulled from outside. But that’s to be it tends to be in very specific areas like communications. Many of the top bosses were people who work their way up internally. That is something I always like to see at a company. Next slide if you could Anirban.

And this is the key risks. This is where I think I’m going first here. So if you want to hit the next one, we can start.

So this is a very dynamic, competitive landscape. Disney (NYSE: DIS) has superior intellectual property and less risk in spending because of that. It is a lot easier to say we’re going to make a new Captain America movie than for Netflix to say what about Colonel America, our new character you’ve never heard of?

Comcast (NASDAQ: CMCSA) is also in theory, a threat here. They have strong intellectual property-ish, probably a quarter what Disney does. They also own the Olympics, which you can argue that could someday make Peacock a player.

Time Warner (NYSE: T) and Discovery (NASDAQ: DISCA) joining up is another competitor. They have a lot of cheap programming plus HBO so they’ve got all those Food Network shows, all the HGTV shows.

Amazon (NASDAQ: AMZN) is buying MGM. Amazon has some arguably good shows. I’m a big fan of The Boys. So they are certainly, challenging for time. And the fact that you probably joined for shipping reasons and you get it for free could mean, hey, I have Amazon, why do I exactly need Netflix?

There will almost certainly be consolidation in the space any of the second tier players joining forces would be significant. We’ve seen some partnerships not in the US that could eventually be a threat to Netflix. But right now, it is a two player at the top of the leaderboard field. Netflix about twice the size of Disney+, next slide please.

It’s really expensive to compete. Content can be evergreen, like most Disney content, or be of the moment with diminishing returns. You have to question whether shows like House of Cards will age well? Something like Ozark might play out, or Narcos might play out better. But there are a lot of shows in the Netflix catalogue that don’t have that evergreen. They have a lack of franchises. As I said before Disney can make endless Marvel and Star Wars shows. Comcast can explain Jurassic Park, Transformers, Fast and the Furious. Netflix just doesn’t have that. They’ve tried very hard with with movies like Bright, with Will Smith, which costs hundreds of millions of dollars. But I don’t think anyone is lining up for the Bright theme park ride or all that excited about the sequel.

And that brings up they have a lack of exploitable IP. When they’re saying, okay, let’s license some of our content to, I don’t know, Universal for theme park use. That list starts and ends at Stranger Things. I’m pretty sure Ozark the ride would have its opportunities. But that one probably won’t get built at a family park. Next slide if you could.

You have to pay the debt back. This is a risk. The company has borrowed $15 billion since 2011. It does not expect to borrow more. And it expects to be cashflow positive this year. So barring anything going wrong, they are in a good place. But $15 billion is still a lot of debt when you have $8 billion in cash on hand. Can they keep raising prices? So I think there might be a price wall when they get to $19.99 that they don’t want to go above? And does the presence of viable alternatives make the already pricey Netflix more cautious about raising prices? Disney+ is half the price more or less. So if I’m picking between the two, I might go with the cheaper one.

Of course Netflix issue more stock if it needs cash, which tends to not be good for shareholders. Next slide, if you would.

My question and it’s one I bring up a lot. Are they good at spending money? I’d argue that they’re kind of not. They’ve spent $41 billion in content over three years, their hit ratio has been low. They would disagree. They would say that all these Adam Sandler films that are servicing the Adam Sandler audience, all of the shows that very small niche audiences a few million people are watching are keeping those people’s subscribers and they’re working well.

I mentioned it before but Pixar, Marvel and Lucasfilm cost Disney $15 billion total. Imagine if Netflix had just bought one of the three of those the position they would be in?

They’re entering the gaming space. I question this. What’s the intellectual property? What are they going to do with games? What does success even look like here? Anirban you can comment to that in a second. And this is my last comment. You’ve heard me say this before on various investing platforms. Their release schedule squanders public relations opportunity. What do I mean by that? They cater to the binge watching audience. So a new season of a show comes out all at once, and it gets all its publicity. It doesn’t get followed the way every episode of any of the Marvel shows or any of the Star Wars shows, will have an Entertainment Weekly post cap or Ringer post cap.  It will have all these sites and podcasts devoted to them. I think it is a giant mistake where Netflix is catering to a very small part of the audience. But they very vehemently disagree with me on that. Anirban, I think it’s back to you.

Anirban Mahanti  20:24

Yeah. Something about content actually. When you’re speaking, this is something that came to my mind. This is just my own viewpoint. I think what I’ve noticed with these streaming players is this is something that both Amazon Prime, and Netflix have done well, but it is what I call “Ex-Hollywood” that they’ve done well. So I’ll give you an example. Both Netflix and Amazon Prime have actually done a really good job of making TV shows in Bollywood, that are driven by top tier star cast with storytelling that Indian audience, for example, have never seen. So Sacred Games over at Netflix. And there are a couple actually on Amazon Prime as well.

I think that’s a model that they could bring to Hollywood where they say, okay, top tier star cast, Tom Cruise star in a TV show. Because it seems like the top tier Bollywood star cast have been willing to star in TV shows, and that’s been really good for them. So I think there might be there might be content game here, which could be different if we played it differently. And again, what I like about these companies is their ability to think out of the box. And that sometimes it’s really useful to basically outmaneuver the old guard.

And one of the things I want to talk about is valuation. So it’s actually, if you think about it on a P/E ratio basis. Over time, the P/E ratio has actually gone down. It’s only about 54. I say “only” because it used to be 200 at one point. So as the company has matured, and this is what we should expect of all companies as they sort of, go from hyper growth to growth, but not hyper growth, that P/E drops. You could look at this different ways and say, well, still you’re paying 54 times last year’s earnings. That might be expensive or not, depending upon how this company keeps growing. But this company has grown at about a 25% rate for a long time, and has an operating leverage that is now showing. So you should expect to see the E in the P/E, or the earnings, of the P/E ratio grow faster, this can shrink really quickly. So depends on what your view is of how long the growth runway is, you could actually consider this to be a company that you might want to buy.

Dan Kline  22:37

And I will jump in with one more thing on growth, it’s really important to know that Wall Street tends to place a lot of value on the quarterly subscriber numbers. And those are not always exactly predictive of where the business is going. They might add 15 million subscribers in the first quarter, tell you that they’ve pulled forward and some people they expected to add in the second quarter. And then the stock will take a hit when the numbers in the second quarter reflect that. So maybe they add 3 million and you look okay, they added 18 million, we actually only forecast 10 million over the six months, but there tends to be undue market maneuvering on this stock based on whichever direction the quarter goes. And the reality is, it’s the year, it’s the five year subscription trend that matters, not whether they add more people in quarter one, quarter two, or pull in people early. So there is a lot of news story price fluctuation here.

Anirban Mahanti  23:30

Absolutely. So for a big company, as Dan just said, this is quite volatile. But as a company, this is more volatile than say Disney is.

Just to summarize, I think one of the key reasons to look at this company. This is an innovator in the field of video streaming and is exploring interactive content and gaming. I think when we think about gaming, I would like to believe, this is what you have to believe, that this company’s angle on gaming will be different from other people’s angle on gaming. And I think this is an area to watch just because of what AR and VR could do. Again, this is something that a tech company, like if you view Netflix as a tech company, can do versus others who are not really tech companies.

There’s still a large addressable market, the addressable market expands, if you think about the opportunities where you go beyond just streaming video, interactive content and gaming. It’s a predictable model, with lots of operating leverage now that the company is actually across the globe. And, of course, as Dan has pointed out, repeatedly, gotta watch for increased competition. How are you deploying cash, there’s always a question of whether you’ve made good use of capital in terms of the shows on the hit ratios and things like that. You need to be mindful of this. Otherwise, it basically looks like this is a TV company or a production house disguised as a tech company.

So when look at the debt and so on. So increased competition and balance sheet questions remain. And of course, there’s also questions I would point out about, what the future plans are Reed Hastings is right. I mean, now that they’ve got a co-CEO, is Reed Hastings actually looking to move into a more passive role going forward. And again, that might have an impact on how this company. And that’s really our pitch from Dan and myself. We’ll take some questions.

Matt Cochrane  25:13

Great. Great, great summary. I really appreciate you covering the bear thesis too. I guess my question is like, they’re already priced more than competing streaming companies, right? Like, Disney is able to bundle Hulu and ESPN+. And Peacock is offering free subscriptions to Comcast cable members, subscribers. I used to think they had a lot of pricing power. And I just used to think they could really rack up that price. And now I’m not so sure.

And I also, I question a lot of their strategies. And I hate to say that because their track record is amazing. Reed Hastings deserves all the credit in the world for being just a great visionary CEO. But I really question the move into video games, for instance. I feel like there’s more obvious ways to drive revenue. And it’s not video games, it’s like maybe looking at some kind of like live programming, like for sports. Or looking at an advertising model for a second tier. I don’t like the way they release all their shows at once. I like it as a subscriber. So I get it, but like, it doesn’t make sense from a shareholders perspective, in my mind. So this is very anecdotal. Very anecdotal. But, I hop in and out of my Netflix subscription. It’s $20 bucks a month, I don’t need to pay every single month.

Dan Kline  26:49

So let me jump in here. I share those concerns. I think I wouldn’t personally, if T-Mobile (NASDAQ: TMUS) wasn’t paying for most of it for me, remain a subscriber. Now my wife would not let me cancel. But I don’t have anything on Netflix that I watch. I don’t think they do a great job in picking content. And yeah, I don’t understand why just because they’ve tried a couple of talk shows that didn’t work. They don’t try 20 more talk shows because it doesn’t cost any money to produce, talk shows? Why aren’t they looking more at like more cooking programming and stuff? That’s really, really cheap. That is why I like Discovery. It costs no money to produce, Guy’s Grocery Games and shows like that. So yeah, I think there are a lot of mistakes, but they lean on their algorithm, and their algorithm tells them that you watched, whatever movie it is X amount of times, and that will keep you there. So they’re taking a scientific and not an artistic approach.

Let me, let me interject. So hold on. Because I think their algorithm sucks. I think it’s horrible. Like, I spend more time looking on Netflix for new shows to watch, than I do watching shows, at least that’s what it feels like sometimes. And I feel like their hit ratio should be higher with an algorithm. Like they’ve talked about their algorithm for a long time. And I feel like they have very, very little to show for it at this point.

So they’re “what content to create algorithm”. And they’re “what content you should see” algorithm are definitely different. So they know exactly when they produce, I mentioned Adam Sandler, but they know exactly what the audience is going to be for that. That’s the sort of like algorithm that they don’t care if we actually liked Birdbox, they care that X amount of people watched it. And they know how that translates to subscriptions. I’d like to see more of an artist touch and in some areas, I’d like to see less of an artist touch. They give pretty much full creative freedom. You know what, that’s not always great. A lot of their shows are very self indulgent, I could go on but I’m not going to. Simon?

Simon Erickson  28:43

I’m going to chime in and ask what type of investor Netflix would be a good choice for? Do we want to see them continuing to plow money into original programming? Where we see that $16-$20 billion a year continue to climb? Or are we more interested in seeing that operating margin go up as they’re leveraging this international subscriber base they have, and like you said, translating titles into different languages.

Dan Kline  29:07

I’ll take that quickly and then let Anirban take most of it. I’ll just say that that is a number that they expect to come down. Because the reality is once you have a certain base of say, children’s programming, kids age out of certain shows, so you don’t need 5000 episodes of a show for say, three to five year olds. So their content spend will naturally come down over time. Anirban?

Anirban Mahanti  29:29

Yeah, so I think in terms of what we think of this investment, I think it depends.  It goes back to the previous question as to what we think they’re going to do. If one is to buy this company to have to make the bet that they’re making, they got to be doing something in say gaming with streaming that other people haven’t thought about. Actually I think this is a pretty lucrative area that I was actually surprised that they haven’t gotten in until now. Because I think there is a different world to explore when you think about content, interactive content, and mixing that with gaming versus how gaming is traditionally thought of. So, there is an opportunity to actually create a whole new category here. So, again, it depends on how innovative these guys are gonna be. If they’re gonna be innovative, I want them to spend. And I’d be happy to have the opening leverage sit at like 15% to 20%. That’s pretty good opening leverage to have, and, put the rest in, but depends on how well they can execute.

Matt Cochrane  30:30

I guess. I feel like their advantage, and they always did well, because they won the distribution game. They just always had a better distribution model. But now I feel like all the other entertainment companies have caught up to that distribution model. And now it’s a content game. And I feel like they are not nearly as good at content, as they are at distribution. And so if distribution was their moat, um, what’s their moat now? And I feel like if the answer is content, like, I just don’t feel like that really works.

Dan Kline  31:01

Volume of content matters. Like, I mentioned that I’m not a big Netflix fan, because like, they haven’t done that many say, new comedy specials, because of the pandemic. But my wife and son like true crime, and there’s like an endless supply of true crime. So like, I think for most people, Netflix will remain a default, even if it’s a default we’re not that happy about. Anirban, I stepped on you again, apologies there.

Anirban Mahanti  31:24

I was gonna say that. We can we can argue about that. Right. But they are still, 200 million plus subscribers, They’re the highest subscriber count of the lot. So they’re doing something right. It might not appeal to us but it’s appealing to someone, which is, I think important. I think Matt said, he looked at them as a distribution company. My view is that they are actually what I would call a pivot company, they pivot. And one of the reasons I put that slide up in the beginning is that there are a company which has pivoted multiple times. Whether it’s distributing DVDs, to going online at the right time. YouTube also had the same choice, but didn’t make that choice of being an on-demand streamer.  They decided to be a UGC player, right. So there are different ways to market. Then they have explored interactive content, they’re exploring gaming. I think they pivot very well, the pivot to making content was at the right time.

So if you believe that they’re pivoting, I think the main thing would be how they’re pivoting. So the distribution is pretty good, that can continue getting them subscribers, but can they continue to pivot and do something gaming that other people haven’t done? That will be, that’s what makes it a multi-bagger from here. Otherwise, it’s probably another, steady winner sort of thing, maybe at this point. Or it doesn’t win because the distribution has been challenged significantly.

One of the other things to remember here is, I think it has become easier for other people to catch up. Because building things on the internet has become easier, right? Building things on the internet has become easier because all these building blocks now exist. Five years ago, though, I would have bet that a company like Disney would not have been able to launch streaming, they would stumble big time, because they will not have the technology stack to actually do it. Even now, I would bet that a company like Disney will not be able to stream to a population which wants it on, lower tier bandwidth, with bandwidth that fluctuates. So for example, on 4G say in India, right, how do you reach out. So there’s a pricing question, there is a technology question. I think there are elements of the stack that are difficult to to deal with. I think that’s their edge. Their edge has been tech, their edge has been to forward think. But time will tell.

Maxx Chatsko  33:49

So the optionality for them to be able to pivot continuously is what kind of makes it interesting to me at this point. But we are in that, in my opinion, in this strange kind of in-between growth and this steady winner that’s enjoying operating leverage. And yes, they say after this year, they should be sustainably positive free cash flow. Right? And that’s a good thing. I’m not sure I agree with, we saw them announce a $5 billion buyback last quarter. And, I mean, is that the right time to start buying back shares. That’s I think my concern is, is if gaming doesn’t turn out to be this massive positive catalyst, where are we? And are investors going to be willing to continue to pay up or will it become a victim of multiple contraction? And that’s I think my big concern and I guess you addressed it a little bit, so maybe not so much a question, you can extrapolate a little bit.

Dan Kline  34:50

Gaming’s not that relevant if they keep adding subscribers. If they can keep on a growth trajectory. And there are some levers they can pull, like I talked about have T Mobile pays for mine. They should do more deals like that. There are some artificial ways. They can also be acquisitive of some content. It’s not like they buy another streamer. But there are some content libraries out there. There are some things they could do. So, I don’t think gaming is going to work. But I also think they do have to keep trying things. And maybe there’ll be some part of it that works. There’s a lot of cool stuff they could do. Like, why not repackage Stranger Things with live trivia? You’re seeing Discovery does comedians watch along to House Hunters? Like, there’s a lot of ways to take that content library, the old pop up video model could repurpose a lot of their older shows. Imagine watching, House of Cards now and doing pop up video with what we know about Kevin Spacey. There is clearly a lot of fun you could have with this. Anirban?

Anirban Mahanti  35:52

No, I think you guys have answered it. I mean, I don’t have anything to add to Steve? I think Steve’s comment is spot on. I mean, if stuff doesn’t happen. This is what Matt is basically saying, right? I mean, if basically they don’t, if they become another TV company, then the multiple could become, 20 times.  If the multiple becomes 20 or 15 times you gotta cut it lose. So that’s I think the again, it’s not an official recommendation. But I think it’s interesting again. You have to have a variant perception to consider buying it at that time. It’s just a guess as to what Matt and Steve have indicated and what Dan is saying, so I don’t have anything to add.

Dana Abramovitz  36:30

Thanks, guys, for the reminder of the Netflix history, it kind of brought me back to grad school and just remembering all of that. And, it’s interesting, because Dan had mentioned the word algorithm multiple times. And, I forgot that they had done so many algorithms. So they did that Napoleon Dynamite algorithm, right, was that Netflix? Yeah? And, so I’m wondering now, fast forward 20 years, that they have, all these subscribers, are they still getting that data? I mean, I remember when I first had it, I would give much more feedback, if I liked the movie or if I didn’t. And now I don’t feel that same level of interaction. So I’m just wondering, how are they, are they getting that data? How are they getting it? And then how are they leveraging it?

Dan Kline  37:22

So they don’t care if you like the movie, and I think that’s really important. They care that you watch the movie, they measure how many minutes you’re watching. So if you watched it, that’s the positive. I keep mentioning Adam Sandler, but nobody else would pay him $20 million a movie, he is no longer a box office draw. But in the world of Netflix, they know exactly what segment of their audience will immediately watch his movie. So nothing is about the passionate, “Oh, my God, Loki was my favorite show of the year” or “the Mandalorian is when I have to talk about”. Everything is this sort of detached robot. And I actually think that’s a mistake that you need to have shows that people talk about, and again, their system of binge watching kind of makes it so you can’t talk about it. Wait, did you watch Ozark in one weekend? I watched it one episode every three days, like how do we ever have this conversation? Anirban?

Anirban Mahanti  38:14

Well, I don’t know the answer to that. I mean, they have a bunch of data, right? So they’re viewing statistics and patterns that they’re watching. I think that the decisions are based on that. But of course, they don’t release that information. So we can’t really assess whether they are making good bets about it or not. I can say that I am with every else. I do have difficulty finding content to watch, except for very few things which I found super interesting. Like, Stranger Things or Narcos.

But I do know that they make a lot of Bollywood content that I actually totally enjoy. I think, they changed the game for how Bollywood content is made. And then Amazon Prime has figured out that, we can also copy the same thing. As I said, they’ve got top flight movie stars who would not think of being on TV, who are actually doing TV now. Because it’s Netflix. And the reason they’re doing it is the global audience because they want to reach out to expat Indian community who live all over the world. So I think they’re doing some things right, I don’t know. But yeah, luckily, we don’t do a five star rating anymore. We do a thumbs up and thumbs down. And that, to me, seems very binary. And it seems very hard to provide feedback, but I think they’re doing what Dan has said. They’re basically doing minutes watched.

Maxx Chatsko  39:35

We talked about a lot of different subscription services out there. But when you think about how households use streaming services, most have subscriptions to multiple streaming services. So does it really matter that much if there’s Disney+ out there or any of the million other ones out there now? It seems like everyone’s still gonna like subscribe to Netflix, even if you’re maybe disappointed for periods of time in the content selection.

Anirban Mahanti  40:00

So can I answer that. I think that’s a great point Maxx is making because I think when you think of streaming, Netflix basically comes to your mind as like as the default. Netflix is streaming. So I think that is what helps them win in different markets too. People know that Netflix is streaming? And you have multiple solutions? Like, we’ve got Amazon Prime. I don’t have Disney+, because my child does not associate anything with Disney. And I don’t care that much for Disney’s contents. I don’t have any idea. And I don’t really care about Star Wars. So I don’t have Disney+, and I’ll probably never have Disney+, there’s no reason for me to have it.

Simon Erickson  40:36

Well, that’s fantastic. Thanks very much to Anirban and for Dan for pitching Netflix, as our mock call this month. As a reminder, this was just to illustrate how seriously we take each of our recommendations each month at 7investing. It’s not our job to go out and recklessly promote and market stocks. It’s to be objective investors that look at the opportunities, and also the risks, of any company and keep each of our subscribers up to date on all of those.

For Netflix, we saw some things we really liked. We saw solid execution globally. We saw scalability and operating margins that were increasing over time. And we saw a lot of optionality as the team pointed out with video games and other areas. But we also took a critical look at some things as well. What about competition from other players? What about algorithms in the discovery and availability of its recommendation engine?We want to always take both sides, the bull and the bear case of each one of these and if you can imagine this Netflix call multiplied by seven stock recommendations each month. That’s exactly what you get access to as a 7investing subscriber.

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