Is Netflix Simplicity Itself?
Reed Hastings is a very smart guy
Everyone seems to have an investment opinion about Netflix NFLX . Will their ad-supported model work? Will they lose more paying users if they police password sharing? Will there be a cultural crisis there? I have no idea.
I only know a couple of things. First of all, the stock has been crushed while the financials have continued to improve. The chart below shows the trajectory of both. I think that $680 was absurd, but at $177, I feel differently.
Secondly, this is not rocket science, and Reed Hastings is very smart. I only knew Reed personally when he was running Pure Software before the Netflix days but watched him work through the DVD to streaming transition where most investors mistakenly didn’t think he could pull it off.
There is more competition for sure. There are way too many of these things. The ones we tend to use the most are HBO, Netflix, and ESPN. Prime kind of comes for free, but we rarely use it. We’re forced to sign up for some random service (Peacock, Hulu, Crunchy Frog) to watch something specific, but then we cancel it.
Best of all, Cheap is Cheap
Cheapness can be tricky because nobody knows what earnings will be. If you believe the current numbers, the stock is trading at a 16x P/E.
Netflix has challenges, but it can determine its own destiny. Netflix doesn’t really have regulatory risks or privacy concerns. Sure they have to execute, but in some ways, they are in a better position than other ad-supported models because they are not currently dependent upon ad revenues during what is a tough time for growth.
I’ve no idea what they will do and how it will play out. I’ve read some thoughtful commentary by people who know more about the entertainment business than I do and came away with the understanding that they certainly have attractive options.
That doesn’t mean the shares can’t go down a lot more. Maybe they will. There’s no way to know. But at the current level, it feels like being long is better than being short.
It could be good.
Despite all the promise, current advertising sucks sucks sucks sucks. I’ve been promised for decades that I’ll see all these great targeted ads based on my interests. Nope. Not at all. It tends to be whatever I just looked at or bought, or even worse, just based on my zip code. Really? And we’re supposed to build a colony on Mars?
Reed is a technology guy, and he understands the entertainment business. What if Netflix and Microsoft actually figure out a good way to do online and streaming advertising? Could it happen? Could those two companies pull it off? Seems like there’s a chance.
I don’t think that most investors are imagining that it’s going to be good. Lots of smart people underestimated Reed before. I’m willing to bet on him and Netflix here.
(Not financial advice of course so consult your tarot card reader before making any actual investments.)
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