Is Netflix stock a buy?

Hello everyone, and welcome to today's episode of the Xillion Master Class. In today's session, we will be conducting an in-depth analysis of Netflix. I am Gagan Sandhu, the co-founder and CEO of Xillion, a platform dedicated to helping you multiply your money and achieve financial independence sooner. Joining me is Chandan Malu, co-founder of SECdi.com, a website designed to showcase fundamental data about stocks and aid in making informed investment decisions. Throughout this episode, we will thoroughly analyze Netflix and, by the end, provide an expert recommendation on whether investing in Netflix is advisable. Additionally, we will explore the investment thesis for and against Netflix. But before we dive into the details, let's have a quick introduction from Chandan. Chandan, please introduce yourself. "Hey, everyone! I'm Chandan Malu, the co-founder of SECdi.com. Our platform simplifies the process of showcasing fundamental data about stocks, helping you make well-informed decisions on whether to buy or not. We focus on understanding the true value of a business by parsing information from SEC filings such as 10-Ks and 10-Qs." If you're interested in exploring SECdi.com and its features, feel free to check it out. Towards the end of this discussion, we will upload the video onto our Xillion Masterclass website, where you can also find previous episodes covering Amazon, Tesla, Nvidia, and various topics like angel investing and real estate investing. Now, let's jump right into the analysis. Is Netflix a good stock to buy at this time?

Before we delve into the analysis, let me provide a brief introduction to Xillion. At Xillion, we believe in a comprehensive approach to personal finance, encapsulated by what we call the Seven Pillars. The foundational layer begins with earning and saving most of it. From there, we emphasize investing in an informed manner, placing those savings into sound long-term investments. Managing spending takes its place as the fourth pillar, despite differing opinions on platforms like Twitter. The fifth layer involves borrowing—understanding when and how much to borrow can unlock significant opportunities. Planning, the sixth pillar, is crucial in coordinating borrowing, spending, and overall financial strategy. Xillion is here to guide you through each of these areas. Lastly, the seventh pillar is protecting; once you've built wealth, it's essential to safeguard yourself and your family against potential downsides. Our team at Xillion has dedicated over 10 years to research, developing this foundational model to help individuals build wealth and achieve financial independence. Whether you're looking to enhance your 401(k) investments or track and manage expenses for better financial planning, Xillion provides tailored solutions for each of the Seven Pillars, ensuring a holistic and effective approach to your financial journey.

The growth story of Netflix is indeed remarkable and holds valuable lessons for investors. As you pointed out, it's evident when we look at the graphs how Netflix has evolved into a colossal force over time. Two key takeaways for me as an investor are understanding tailwinds and adapting to change. When Netflix was a small player competing with the likes of Blockbuster, they navigated the challenges of the era when CDs and DVDs were predominant. Witnessing their transition from physical media to original streaming content has been nothing short of extraordinary. It's a testament to their ability to evolve and capitalize on emerging trends. From a customer perspective, Netflix has become an integral part of many households, with a widespread adoption rate. As an engineer, I can attest to Netflix's excellence in infrastructure, setting a high standard that few companies have been able to match. Chandan, feel free to share your insights into Netflix's growth. Absolutely, Gagan. Netflix's growth trajectory is a testament to their ambition, expertise, and the talent they've cultivated over the years. Whether in engineering, production, or sales and marketing, their success reflects a holistic approach. Looking at the numbers, from a few billion in revenue in the 2010s to over 30 billion dollars annually now, it's an impressive track record. The growth, especially after the introduction of streaming in 2007, showcases their resilience and adaptability. Even during periods of content loss and attempted company splits, they rebounded by investing in original content. However, it's crucial to note the growth dynamics. The international expansion around 2018 has contributed to sustained growth, but the pace has been gradually slowing. The pandemic-induced surge in 2020 was a notable exception, but that boom was temporary and not sustainable. The growth rate, year-over-year, has shifted from 30-40% to the current 2-3%, excluding the anomaly years. This slowdown is a vital aspect we'll delve into further. Now, let's talk about the price-to-sales ratio. Netflix currently stands at around 6, calculated by dividing its market cap of about 190 billion by annual revenue of 30 billion. To provide context, tech companies typically range between 5 to 10 in this metric. Google is at 6, and Amazon, a competitor in the streaming space, is at 2.4, though Amazon's primary business is retail, making it a different comparison. These metrics give us a snapshot, but as we'll discuss, there's more nuance to consider in evaluating Netflix's investment potential.

When we compare Netflix to other players in the streaming space, such as Warner Brothers Discovery, Disney, and Comcast, interesting dynamics come to light. Warner Brothers Discovery is trading at a price-to-sales ratio of 0.5, indicating a heavily discounted valuation compared to Netflix. Disney, despite being an OG in content and distribution, is trading at 2X its annual revenues, even at a five-year low. Comcast, often perceived negatively, is trading at 1.4, reflecting a different but somewhat comparable space to Netflix with its ownership of Peacock through NBC Universal and Universal Studios. While Netflix might seem cheap when we look at its past, a comparison with its competition suggests a more nuanced perspective. Chandan, your thoughts on this? Absolutely, Gagan. It's essential to recognize that the entire streaming industry is currently facing devalued market conditions. Most companies in this space have significant debt, which the market views unfavorably at the moment. Despite being one of the most loved companies in the U.S., Comcast, for example, faces lower valuation due to its debt and perceived market sentiment. Netflix stands out as a leader among streaming companies, primarily because it's turning a profit in a business where many are still in the red. It has maintained its status as a darling of the markets for a long time and is a crucial component of the FANG group. Touching on the topic of debt, the market's aversion to companies with heavy debt is multifaceted. Firstly, as you pointed out, companies may face challenges when their debt comes up for renewal, leading to increased interest rates. Secondly, the streaming business is inherently capital-intensive, especially in content production. Most companies are investing in technology and infrastructure, making it a waiting game for profits to materialize. You rightly highlighted, Gagan, that Netflix's capital-intensive nature is evident in its substantial debt issuance and cash flow negativity for many years. The company invested heavily in content production to attract and retain subscribers, contributing to its current strong position. Chandan, you brought up an essential point about Netflix's operating margin and cash flows. As we see, their operating margin has steadily grown, reaching almost 20%. The current quarter's expectation is to maintain or even grow this margin. The substantial free cash flow, now exceeding $5 billion, is a testament to the success of their content investments. This underscores the classic tradeoff in business strategy. Until recently, Netflix was primarily focused on investing in content to drive subscriber growth. However, with the rise in debt costs and a slowdown in growth, they are now adjusting their approach. They are slowing down some investments deliberately, recognizing that pouring billions into more content may not generate proportional increases in new subscriptions. It's worth noting that this strategic shift might lead to potential changes in Netflix's financial practices, such as share buybacks, but as of now, they haven't initiated any. This shift indicates the maturation of Netflix's business strategy as they navigate the evolving landscape of the streaming industry.

It's interesting to note how Netflix's stock has experienced a 50% drop in the past year, and part of the reason for its recent uptick is the decision to engage in capital allocation, particularly through stock repurchases. The announcement of a $3.5 billion stock repurchase has been well-received by the market, as Wall Street tends to favor companies that show commitment to maintaining profitability and improving share prices through buybacks. This move indicates that Netflix's management is strategically using some of the cash flows that were previously directed towards content creation and marketing to enhance shareholder value. Now, let's explore some of the tailwinds working in favor of Netflix. With approximately 80 million subscribers in Europe, the Middle East, and Africa, another 80 million in the U.S. and Canada, and an additional 80 million in the rest of the world (Asia Pacific and Latin America), Netflix has achieved a well-balanced distribution across these regions. The fact that Netflix is a global company with a diverse user base positions it as a classic international player. This expansive user base contributes to Netflix's near-monopoly on its curated content. While they do license some content from others, their original productions give them a unique edge. With such a captive audience, Netflix has the potential to increase prices, as seen in recent quarters, and they are constantly exploring innovative approaches, such as addressing password sharing as a way to encourage individual subscriptions. The introduction of ad-based streaming content is another notable move by Netflix. While they have traditionally avoided ads, this strategic shift, along with partnerships like the one with Microsoft, opens up new revenue streams and benefits both subscribers, who may get lower-priced options, and the company's bottom line. Furthermore, the distribution power of Netflix, with a quarter-billion subscribers, represents a highly desirable market segment. This untapped distribution channel positions Netflix to potentially attract ad dollars, introducing a new revenue stream. Lastly, Netflix's status as the best streaming product globally, with hyper-localized content in various languages, creates a wow effect. From technological innovations like skip intros and automatic play to being ahead of the competition for nearly a decade, Netflix has consistently demonstrated its ability to stay ahead in the streaming game. However, it's crucial to acknowledge that competition is heating up, with Apple being a significant player in the streaming space. While Netflix has been a survivor, navigating challenges and competitors, the landscape is evolving, and the company will need to continue adapting to maintain its position in the market.

Netflix has indeed had a volatile journey, and while not as extreme as some, it's faced its fair share of challenges and market fluctuations. The company's beta of 1.24 indicates a moderate level of volatility, which is not uncommon in the tech and entertainment sector. In terms of competition, the streaming landscape has become increasingly crowded. The onset of the COVID-19 pandemic accelerated the entry of new players like Disney, HBO, Peacock, and others. Each of these services is vying for a piece of the streaming market, intensifying the competition for subscribers. You've raised a valid point about Netflix being a single-product company. Diversification is often considered a strength in the business world, and companies with multiple revenue streams can weather economic storms more effectively. Amazon, for example, has become a tech giant with diverse business segments, from e-commerce to cloud computing. As you rightly pointed out, Ted Sarandos, Netflix's Co-CEO, comes from a background rooted in the era of VHS tapes and DVDs. His ability to envision and lead Netflix into new product domains, especially considering the rapidly evolving tech landscape, is a significant factor to watch. The company's foray into online gaming is an interesting move and could potentially open up new revenue streams. Identifying the "next Netflix" can be challenging, and it's essential to recognize the unique qualities that make a company exceptional. Customer loyalty and a visionary founder are indeed strong indicators. Companies that continuously innovate and capture the hearts of their customers often have the potential for long-term success. Regarding competition, you've rightly mentioned that while companies like Disney and HBO offer strong content and may be viewed as competitors, Netflix still holds a significant lead. Factors such as international distribution, hyper-localized content, and a massive and diverse subscriber base contribute to Netflix's strong market position. Investors looking for the next big opportunity should keep an eye on companies that demonstrate customer-centricity, visionary leadership, and the ability to adapt to evolving market trends.

In today's deep dive, we dissected the current state and future prospects of Netflix, a streaming giant that has become synonymous with online entertainment. Chandan and I delved into various aspects, from the company's historical journey to its current market standing, exploring factors that could influence its trajectory.

A key metric highlighting Netflix's influence is the substantial share of screen time it commands. Approximately 8% of people in the US spend their screen time on Netflix, underscoring the platform's significant presence in the entertainment landscape. This dominance is reflective of the shift from traditional cable services to streaming platforms.

Netflix's market capitalization currently stands at approximately $190 billion. Despite its efficiency, the price-to-earnings ratio is relatively high at 43, emphasizing investor optimism. However, it's crucial to recognize that market dynamics evolve, and predicting Netflix's future trajectory involves assessing various scenarios.

An optimistic outlook factors in international expansion, specifically in Asia and Africa, where middle-class growth is robust. With a presumed 5% growth rate, improved operating margins, and increased ad revenues, Netflix's market cap could potentially soar to around $400 billion in the next 5 to 10 years.

In light of Netflix's global reach, consistent innovation, and potential for growth in emerging markets, the consensus recommendation is favorable. The current market conditions offer an opportunity for investors who believe in Netflix's continued expansion and success.

In conclusion, the decision to invest in Netflix should align with an individual's belief in the company's growth potential. The paradox of market sentiment — reluctance during downturns and eagerness during upswings — serves as a reminder to focus on long-term value. Remember, strategic investments made today can pave the way for financial success in the future.

Thank you all for joining this deep dive into Netflix. If you're seeking more insights into potential investment opportunities, explore Xillionapp.com. Our promise is to guide you toward financial freedom within 10 years, with just 10 minutes per week. We look forward to your continued engagement, and until next week, happy investing!