Wachiwit
The following segment was excerpted from this fund letter.
Netflix (NASDAQ:NFLX)
Netflix had a great quarter, with shares appreciating more than 30%. The stock had simply gotten too cheap during Q2, with shares trading for about 16x trailing earnings. This was by far the lowest multiple on the stock in a decade. This below-market valuation was irrational for the world’s dominant streaming platform.
Despite being near saturation in some markets, Netflix continues to grow. After two consecutive small declines in subscribers that spooked investors, Q3 brought growth of 2.4m subs and a guide of more than 4m in Q4. Excluding currency impacts, revenue grew 13% in the third quarter, driven by revenue per member growth of about 8%. While dollar strength remains a headwind, we see several large positives for Netflix going forward.
- Further price increases. We remain confident that Netflix, at least in the US, is under-monetized relative to its usage. We think the company will continue to grow revenue per user in the ad-free tier.
- Rightsizing of expenses. Netflix, and the streaming industry more generally, spent money like drunken sailors for the past five years. For Netflix, this meant billions in cash outflows; for their peers, it meant billions in operating losses. But this era is ending, with Netflix saying in their Q2 letter that they’ve “adjusted their cost structure for the current rate of revenue growth.” Competitors are cutting expenses as well.
- Advertising rollout. Netflix recently announced the rollout of an ad-supported tier ($6.99 in the US) starting in November of this year. As we put it in Q1: “Advertising is a large portion of Hulu’s business, with eMarketer estimating that Hulu generated $3.1b in advertising revenue in 2021. The advertising business at Netflix has the potential to be multiples of this size as Netflix averages more than twice Hulu’s share of total US TV time. We suspect that given their technical chops, ability to recruit talent, and the TAM of the opportunity, Netflix will be able to build out a world-class programmatic advertising business in short order that will bring in substantial additional subscribers and revenue.” At long last, Netflix will be directly compensated — at least in the ad-supported tier — for the gigantic amount of time its subscribers spend using the service, which amounts to 7-8% of total TV viewing in the US and UK. We expect the ad-supported tier to generate tens of millions of new subscribers over the next few years and drive billions of profits.
With its best-in-class management, infrastructure, scale and content, we believe that Netflix will continue growing revenue and margins for the foreseeable future.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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