JULY 19, 2020
Link to the Real. It Pays.
close last Thursday Netflix put their Q2 facts on the table. Oops, it was really their suspicions that enraged. Shares were indeed priced for perfection. They promptly plunged roller-coaster style 11% in after-hours. But the fall actually began on Monday and didn’t end until the close on Friday.
What’d the Los Gotos-based SVOD superstar say that enraged? Simply the expectation of “2.5 million net adds” for next quarter–Q3. They also said the COVID crush of new subs is “tapering off.” That did it.
O.K. Well, John Quincy Adams pointed out that “Facts are stubborn things.” And NFLX isn’t the only name in SVOD town. Like Tom Cruse said in The Color of Money, “Everybody’s doin’ it.” Disney’s doin’ it–since last November. So’s Hulu, AT&T with HBO MAX. Prime too. But what about the enduring pundit love of Disney? So Netflix v Disney, when “Facts Are Stub-Crazy Things. NFLX. Disney.”
the market has splintered. Strength moves about. Now you’ll get calls from every corner to broaden into cyclicals/value. Some simply say the work-from-home, stay-at-home, and mega-caps are all slowing, as the trade widens. Yeah, and it was inevitable, and most are too expensive. Valuation matters. Think Zoom and it’s overdue correction now here. A partial position of ZM is doable here, with a trailing stop.
As we noted, Netflix took a double-digit dump last week, following the release of a Q2 EPS miss and sub guide-down. We grabbed shares on the knowledge that initial reactions to earnings are routinely overdone. Revenue for the quarter was $6.15B vs. $4.92B. in the year ago quarter. That’s a 39.6% growth rate. Consensus was for $6.08B. EPS was $1.59 vs. $0.60 in the year ago quarter. Yet consensus was for $1.85. But none of this turned the moment ugly. Subscriber growth guidance did that.
The torches and pitchforks came out over the 2.5 million new global adds projected for Q3. That’s will be in comparison to last year’s Q3 net global adds of 6.8 million. If realized, that would prove a 63.2% net subscriber decrease Y/Y. Some said it was simply a “conservative” guide. Seasonality could also be at work. Yet how about pulling so much grow in from the future? What does the daily chart say?
-Netflix Inc. NFLX: NASDAQ-
we expected growth is slowing as consumers get through the initial shock of COVID-19 and social restrictions.” –Netflix on Q2 results. Comments reflect the thinking that future subscriber growth has temporarily accelerated. Everyone was at home during the quarter. The facts are that global paid subscriptions for Q2 totaled 10.1 million outpacing both the company’s Q2 guidance of 7.5M. and consensus of 8.26M. So where does that leave Netflix?
Subscriber growth has long been the company’s most important metric. NFLX added 26 million net subscribers in the first half of this year. Compare that to the 12 million total in 1H 2019. That 26 million YTD nearly matches the 28 million FY 2019. What’d the company say? That rate is “tapering off.” Of course it is. NFLX isn’t some fresh startup. Yet again, where does this leave Netflix?
-Netflix Inc. NFLX: NASDAQ-
remains the hands-down world leader in streaming video on demand(SVOD) with 193M. paid subscribers in over 190 countries. Netflix pioneered the streaming business beginning in 1997, or 23 years ago. They also own the largest database, by far, in the business, along with the best, by far, predictive algorithms. Both allow this company to provide the best individualized viewing recommendations to subscribers. The database also precisely shows where to invest capital to produce the largest return on investment(ROI.) Think largest database, not just a database.
And the field? A basic subscription to Netflix is $8.99m, while Disney+ runs $12.99, and HBO MAX $14.99. Disney+ now has 50 million total subscribers since its’ launch November 12th of last year. Impressive growth. Yet Disney also has a crippled theme park business, a shuttered cruse line, and a movie studio unable to sell to theaters, with a share price down -18.5%YTD, -16.7% 1Y. Nonetheless, like scratched vinyl many continue to recommend the stock. Does anyone remember when DIS spent three years between $99 and $125?
Disney currently submarine’s below its’ pre-COVID high, with a declining 200-Day SMA. Meanwhile all three of NFLX’s SMAs soar and it’s returned 227.3% over the last three years and 335.4% over five. Disney’s offered 17.8% and 6.9% over the same. And lately? NFLX is up 52.8%YTD, while DIS is down -18.5% YTD(*as of 11:30 EST, 7-17-20.) A catch-up play? No one comes from behind with three flat tires; again, non-cruising cruiseline, crowd-crippled theme parks, & empty movie theaters.
Long-time CEO Bob Igor has lead Disney into its’ modern and formidable form. The acquisition of Marvel, Star Wars, and Pixar, were brilliant, and guarantee the company a prime place in the SVOD wars, a place stronger than AT&T’s HBO MAX and Warner offerings.
Yet the company has one foot in SVOD and one deep in the cable realm–the Disney Channel, along with the ABC family of channels. Industry insiders point out that attempting to direct content between two key outlets is one of the toughest gigs in the business. Which bulldog do you feed? Caught in between is Disney’s dominant ESPN and live sports, a conundrum for which no one possesses an answer.
Disney’s current subscriber base of 50M. is indeed impressive, yet they possess no where near the depth and breadth of guiding data that Netflix brings to bear daily. That data guides critical content acquisition and creation decision-making, in a stunningly-expensive business where mistakes can kill. Additionally, Netflix’s proprietary content vault has been growing, rapidly, for years, etching away at an advantage DIS has long leveraged over competitors.
It’s all relative.
performance is no guarantee of future returns. Nor are head-to-head comparisons an attempt to diminish the accomplishments of great companies. Such comparisons are called discriminating investing. Grand companies often prove poor bets. Think Exxon. We compare these two because both offer similar services fit for the time. No change in our COVID circumstances is on offer soon. Thus this already trend-driven industry remains a secular growth story on steroids.
Netflix offers the largest stable of content; movies–5000+, and TV shows–over 1700. The company is also beloved by content creators for its’ strict “hands-off” reputation. Thus they have developed and nurtured relationships with an army of top-flight content makers who love them as both a safe creative home and a frictionless outlet offering a massive builtin audience base. How many remotes have a dedicated Netflix button?
Is NFLX a buy? Last Monday shares opened at $567 and closed on Friday at $492. That’s a 10% drop. What they do, SVOD, is increasingly the mode of delivery for video content. Americans hate waiting. Disney parks offer a lot of waiting. The cord-cutting move continues. Netflix, specifically, has broken the forty-year hegemony of a ravenously-greedy cable industry, one committed to not offering a la carte. As overlapping pie wedges, linear ad-driven TV fails, and SVOD grows. Content seekers are now simply steering around obdurate chode-bloated cable.
Netflix co-founder and CEO Reed Hastings always says when questioned concerning competitors, “There’s enough room for multiple players.” Netflix will be there, likely providing returns to shareholders that Disney can’t even touch. So, is Disney a good buy? No. COVID has crushed three of their businesses, and Disney+ won’t even dent that. Meanwhile, NFLX is a buy, on this double-digit pull back that we feel will be soon forgotten. A 52%YTD run for this company is not “too far too fast.” As always, good luck and good investing.