NETFLIX (NFLX) INVESTMENT THESIS

In 2012, as Netflix was beginning it’s transformation from a DVD rental business, CEO Reed Hastings stated that by 2020 all television would be watched via online streaming. It’s almost as if the world didn’t believe him which provided not only a massive first mover advantage but also the ability to develop the market and become the ‘standard’ within a secular trend.

INVESTMENT THESIS

The Investment Thesis for Netflix is founded on four pillars

1. BEST IN CLASS STREAMING
Netflix has the largest content library and is directing efforts towards original content production for global markets. For 2018, the Netfilx production budget is $8 billion, second only to Disney at over $12B and far exceeding the major US networks CBS $Xx, NBC $xx.
Secular trend towards online streaming - societal behaviour towards entertainment consumption has shifted from the advertisement based network system towards the ‘anytime/anywhere/as much as you want’ subscription service. Anyone with an internet can watch Netflix.

2. GLOBAL MARKET
Netflix has diversified itself away from a North American domestic market towards a globally diversified strategy. This provides unlimited market potential and increased stability as macroeconomic conditions fluctuate between regions.

3. EXPONENTIAL SUBSCRIBER GROWTH
Exponential Subscriber Growth - looking beyond the number of subscribers added currently, it’s important to recognize the self fulfilling trend. Where a household of 2-3 children grow up with Netflix, they effectively become future subscribers.

Strengths/Weaknesses/Opportunities/Threats
Netflix has a number of strengths and opportunities, however it also has weaknesses and faces threats.

Competition and Content are the two biggest challenges. These are not new and Netflix has built itself, and the market, into the global leader. Disney is expected to commence its own streaming service and most recently Apple announced it would start a streaming service expected in the first half of 2019.

What does that mean at MONEYWISEHQ?

A secular trend is a change to the way society, as a whole, behaves. Reed Hastings very accurately predicted the secular trend towards online streaming and many would argue that Netflix created the trend. With over 125 million subscribers and growing, the company has capitalized very aggressively on it’s first mover advantage.

Each time there is a headline regarding increased competition, the stock price is affected. The question has to be asked, will increased competition cannibalize Netflix subscribers or will it act to enhance and accelerate the secular trend toward online streaming adoption and expand the overall market? If Hastings is correct and all content is viewed through streaming, the trend is towards less cable and there remains a huge potential untapped market.

Netflix has created it’s own success and proven that it has the ability to adapt to changing trends, develop effective strategies and execute on those strategies aggressively. The market dynamic will evolve and the exponential subscriber growth will expand. Netflix will capitalize on opportunities beyond our comprehension, the same way it did in 2012.