¶ Comparing Streaming Services and Netflix
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 ?
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 .
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 .
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 . 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 .
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 ?
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 .
So I guess you'd argue that , despite the competition , netflix has a wide moat . How does the moat translate into profitability and cash flow .
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 .
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 .
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 .
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 .
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 ?
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 ?
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 .
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 .
Love is Blind , you and me and everybody listening to this podcast .
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 .
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 .
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 ? 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 .
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 ?
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 .
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 ?
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 .
So let's look at the mailbag . So the question is whether we hold Amazon and Disney in addition to Netflix .
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 .
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 .
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 .
Yep , they're named that .
¶ Podcast Update and Thanks for Listening
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 ?
Nope , that's it . It was a really great Opportunity to talk to you and to everybody .