1. Would you buy Netflix?

No. My investing philosophy is about buying companies to hold for 10 years or more. I think Netflix is too risky at this price. In addition, Netflix’ competitive advantage is, in my opinion, much smaller than the majority of Netflix-stock-cheerleaders make it out to be.

2. Is it a good company?

Oh yes. I think Netflix is a wonderful business. But at the price it’s trading at it looks to me that everything has to go perfect for Netflix in order to provide decent returns in the next 10 years.

3. Why do you think that Netflix is such a hot stock right now?

Obviously it provides something people want. Actually, I think Netflix started providing something that people wanted even before those people knew exactly what it was they wanted. But you can ask yourself “Why do I use/buy Netflix?”. I think the answer to this is that Netflix provides a service that no other company does at this moment namely, global on-demand viewing of content for a low price on multiple devices. In essence their competitive advantage consists of a good combination of [1] accessibility and [2] content.

4. So what makes you skeptical about Netflix’ future?

Well, I’m not skeptical about it’s future. I just think that the market is pricing it at a ‘monopoly’ premium. I think this is an error. When it comes to the on-demand-viewing part (accessibility), they have no competition in this (except for maybe Youtube). So I’m thinking, “what happens when competitors start offering comparable services”. It’s should be clear that their popularity will attract competition (it already is). What if they have to compete with Amazon, Time-Warner, Disney, Verizon, FOX etc? When those companies start providing similar services what will make you stick with Netflix? I think it’s the second part of their competitive advantage and that’s content.

5. You think their accessibility advantage will be eroded and it will come down to competing on content?

Exactly. When different content owners can provide the same service Netflix does you will choose the ones that have the best content or the ones that are cheap. And although Netflix has some good exclusive content, I doubt it’s worth that much more (if it even is worth more) than the content of some of our established media giants.

6. You don’t think the brand Netflix is worth something?

No. I buy Apple or BMW because they represent luxury, style, exclusivity and let’s face it, you can show them off. I buy Netflix because (as mentioned) they have good accessibility and content. When others provide better, I switch (or add). The switching costs for moving from Netflix to a different service are basically non-existent.

7. Scott Galloway has called Netflix the operating system for the TV. You don’t think that’s worth something?

I think this is an erroneous analogy. Windows is the operating system for PC and it’s difficult to switch to a different OS without losing accessibility to your applications that run on Windows. The operating system for the TV is not Netflix but Android (or some other Linux derivative). Netflix is an app on that system. It’s easy to uninstall it or add a second or third app from Disney or Verizon. I believe Android is more like Windows (unappealing to remove from the system), but Netflix is like Firefox. Very easy to uninstall and switch to Chrome.

8. So it’s a good company but not one you’re buying.

Yes. I would buy it at a lower price-multiple or maybe during some sort of market crash. It has some good content and is providing a good service. But if you look at it’s future competition I cannot convince myself that the premium is worth it. For now Netflix has little to no competition so in the short term it might well double in value. Longer term though I think Netflix is still a good company but I find it’s premium a bit too risky.

 

PepperGallon – DM

20180425