🗞 Netflix: Value Play or Value Trap?

Happy Sunday! 👋 

This week we’re taking a look at one of the biggest battleground stocks in the large cap universe, Netflix.

Let’s dive in!

Netflix: Value Play or Value Trap?

Shares of Netflix are now down 36% over the last 12 months. 

Of the 50 largest companies in the world, that makes them the 2nd worst performer of the year, behind only Oracle.

Throughout its ~25 year history as a public company, shares of Netflix have dropped by 50% seven different times. That has included three different instances of more than 70% drawdowns.

And still, remarkably, if you invested $10,000 in the Netflix IPO, you would now have $6.5 million.

Why the drawdown?

In virtually every major drawdown Netflix has experienced, you could point to an obvious culprit.

• 2004: Blockbuster launches online DVD by mail service. Shares drop 75%.

• 2012: Netflix tries to split its DVD-by-mail and streaming businesses (called Qwikster at the time), spurring massive cancellations. Shares drop 81%.

• 2022: Subscriber growth stalled amidst increasing streaming competition. Shares drop 76%.

This time around there’s a new culprit: Engagement. 

In isolation, 2% growth in view hours doesn’t look like too bad of a statistic. But that’s a holistic metric. On a per subscriber basis, view hours declined by an estimated 7% compared to last year.

Data from Nielsen seems to support that. Over the last 4 years, YouTube’s share of US Streaming TV time has grown from 21% to roughly 28%. Meanwhile, Netflix’s share has collapsed from ~25% to ~16%.

Despite this drop in market share, Netflix’s revenue growth has remained resilient.

There’s a couple of ways to think about this. To the skeptic, it might appear that Netflix is mortgaging its moat. In other words, they’re raising prices while losing share, which could be a recipe for disaster.

But to the Netflix believers, engagement (and in particular, US streaming TV market share) is simply a misleading metric. It’s not about the sheer amount of content consumed, it’s about the value of content consumed.

Put another way, there is no longer a one-to-one correlation between engagement and monetization.

Here’s what Bill Ackman had to say about it in a letter he published to Pershing Square shareholders this week:

This is an important distinction.

Greater content consumption does not directly equate to a higher willingness to pay. Live events is a great example of this.

According to Netflix’s management team, live events only accounts for 1% of view hours. However, “6 out of the top 10 new member sign-up days over the past five years have come from live events.”

But this hasn’t stopped investors from souring on Netflix’s stock.

Netflix currently trades at an Enterprise Value of $330 billion, giving them an EV/EBIT of 23x. That’s the 2nd lowest multiple they’ve traded at over the last decade.

While it remains to be seen whether or not the current engagement slowdown will eventually flow through to the P&L, management has made their opinions on the debate clear. Not just through their words, but through their capital allocation.

That’s all for this week. 

If you have any thoughts on Netflix or questions about fiscal.ai, feel free to reply to this email!