What lies before us
I will come right out and say it, everyone under the age of 40 with a few spare bucks must invest in Netflix (NASDAQ:NFLX).
Allow me to regale you with my reasoning. Put simply, the opportunity cost (you remember that from 8th grade economics right?) is too great. To not take a chance on Netflix taking over the world would be the most foolish thing since the French inked the Louisiana Purchase.
I have heard it argued every which way - overvalued by any metric under the sun or the cheapest stock on planet Earth because it will soon replace every traditional TV channel we have been watching since Philo Farnsworth invented electric television.
Whoa, why so heavy bro?
I speak with such dramatic flair because I see the possible opportunity in the shadow of the ones I have missed.
As a young investor who graduated college and started investing after the Great Recession and Financial Crisis, I am fully aware of the fact that I have not been through "it," whatever "it" is.
Some would say it is a time of such fear, panic and uncertainty that truly tests your skills as an investor.
Others would say it is when emotion grips the market, and with every news story or bankruptcy press release the cries of men, women and shrinking 401(k) accounts can be heard if you just stop to listen.
I have read about how investing a paltry sum of money at Coca-Cola's (NYSE:KO) IPO nearly a century ago would have made someone filthy stinking rich.
I have watched the likes of Facebook (NASDAQ:FB), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Regeneron (NASDAQ:REGN) and others fly up 600 or 800-plus percent to become the outliers and yardstick every growth stock hopes to become.
Yet I wonder, could Netflix be the next one? The next stock to be studied when investors search for the home runs instead of the base hits.
Could the potential market dominance and growth of Netflix be something so large, so inconceivable, that no matter how much we might try to run the sucker up, it cannot be priced in?
What is possible?
Netflix needs the internet, it is that simple.
The remote control does not exist, does not have a function until the television is created, popularized and accepted en masse.
As I write this, around 3.4 billion people on Earth have access to internet. That leaves a good four billion who do not have access.
If this rapid pace continues, by 2017 or 2018, I expect that number to cross above and beyond the four billion mark.
This is what I mean when I say opportunity. Netflix does not tap into the limited but growing market for heat-resistant bolts that can withstand seismic pressure from underground drilling operations or have a hold on the market for pinky toe imaging machines.
No, Netflix taps into our very human essence. Humans love to be entertained. In fact, we need it. One study says that over 60% of people would need a million dollars to give up TV for the rest of their life. Rest assured, we need it.
Will I regret it if I don't invest?
Netflix currently has over 75 million members. You will notice right away, how I said millions here despite saying billions above.
So what would a Netflix with a billion streaming customers look like?
In 2015, Netflix's net income was 1.8% of revenues. In 2014, it was 4.8%. I imagine the long-term number should be right in between these two, as 2015 reflects an unsustainable amount of high spending for new content, but mostly for international expansion.
Let's say in 10 to 20 years, Netflix costs $15. Okay, so a billion customers paying $15 per month equals... $180 billion in revenue. Sounds crazy right? Well Apple (NASDAQ:AAPL) has $260 billion in revenue, not that far off.
At a 3% net income-to-revenue ratio, a middle ground between the past two years, earnings for Netflix in this scenario would be $5.4 billion. That earnings number doesn't sound unreasonable, although the revenue sounds too good to be true but you know, so was landing on the moon (or so we thought).
What could get in the way?
So now that we have outlined the moonshot scenario, it seems like we might as well take a chance right? If things work out, it could be one of the best performing stocks, well, ever. What do we have to lose and what could go wrong?
International expansion could fail
What we know is that a tiny part of America loves Netflix. It is especially popular with younger demographics and almost every day Google News tells me how cord cutting is accelerating.
But how do we know Thailand likes Netflix? Or how about Iceland?
I doubt Netflix can simply port over Simpsons reruns from the 90s there, so that means more and more spending on original programming and building out their catalog in every single country they enter.
And that leads us brilliantly into the second concern...
Costs, costs, costs
For how Netflix accounts for their costs related to producing and obtaining content, their 10-K states:
Essentially, Netflix amortizes or spreads out production and acquisition cost over either the contractual life of the content or the expected useful life the content may have based on expected viewing patterns.
Netflix's margins have been contracting in recent quarters and remain negative for the International segment as they spend big on advertising, marketing and content.
The question Netflix still needs to answer is how much content does each region/country need to be satisfied and keep their subscription at a given price point.
Traditional TV channels have always had to juggle this with figuring out how many new shows to release, what to renew, when to show reruns, etc. This was also largely dictated by timeslots as there are only so many primetime hours in a day.
In the case of Netflix, people can watch whenever, wherever and for however long they want.
The question remains, how much entertainment do we need to stay interested and how much will it cost Netflix to continue to meet this demand going forward?
Internet TV distribution might become commoditized
When most Americans want to sign up for Internet or TV, they have one, maybe two options. If they are lucky, they could consider a satellite provider as a third, but it is rare to have so many options.
This unspoken but mutually accepted Monopoly among telecoms is what makes them such cash flow machines, but the future of the internet TV landscape will likely not have similar features.
If I want to watch silly videos online there are thousands of places to go. While YouTube is certainly the most popular and logical first choice, many don't choose to go there because it is the only service in my "neighborhood" of the internet. It simply doesn't work like that.
And that is the beauty and curse of the internet.
If Internet TV becomes the "new TV," and we are not sure yet that it will, what happens when there are 10 players in the space all buying the same content and trying to reach the same audience. What happens when these players don't enjoy any of the physical advantages that on the ground telecoms do?
At that point, the only thing separating each are price, and to a tiny degree customer service. That is what it means when something becomes commoditized.
If there are several shops that sell the exact same bottle of cola, why do I choose to go to one over the other? Location to me, price, how nice the checkout people are, etc.
Netflix only has their original programming to fall back on at that point, and while all indicators seem to show that they have an uncanny ability to secure/generate great original content, can that last forever?
Is there anything stopping Apple or another company from luring away all the directors, actors, or whatever is responsible for Netflix's recent programming triumphs with buckets of cash?
What should very young investors be focused on?
Investing strategy is simple in concept. The basic premise is that what works and may be appropriate for a 65-year-old new retiree may not work and be appropriate for a 25-year-old two to three years into their new shiny career.
Ideas and opinions abound about how this should be done. Buy only growth! Buy what you know! Take huge risks with huge rewards!
What I like to think about in my situation is that, okay, sure, I can play a merger arbitrage play that might give me an 11% return if the merger takes four to five months to play out then that is great.
A lot of investors and firms do very well that way. But for someone with such a small amount of capital, those type of nitty gritty efficient plays are not going to cut it. When your investment returns in the scenario you are looking at are less than you could make from a day driving Uber (Private:UBER) or delivering Pizzas, it starts to not look so great.
I also think young investors need to be careful with technology overexposure. While technology is great and improves our lives constantly, it has also proved a hard place to make money.
The successes of Microsoft, Google and others have stuck with us, lest we forget Pets.com and the others that had similar dreams, promises, aspirations, yet fell by the wayside and took our hard-earned cash with it.
My attitude is to find situations, not necessarily of a growth or value character, that allow for passivity. At this point in your life, you are so industrious, so full of life and great ideas that your greatest achievements won't be made in the stock or bond markets but out there in the real world.
Learn a language. Invent something. Challenge yourself.
So with that in mind, how should you invest? I think the right strategy is to spread some cash around in things that you don't need to worry about. Spending all day at your computer to grind out the 11% returns are great if you have millions invested but won't turn your $40,000 into a million any time soon.
So throw some money at Netflix and lock your brokerage account password in a safe and check up on it in 10 or 15 years.
And throw stocks such as General Electric (NYSE:GE) some money too. They will likely still be making things in 20-30 years. They might be flying spaceships and phasor, but making things nonetheless.
Aren't we chasing Netflix here?
News flash, this is not the first Netflix article ever written.
Where were you when Netflix was at $8 huh? That was the time to invest you say.
Fair point. Chalk it up to being focused more on burritos and solo cups than investing at the time.
But are we too late?
I would say no, with the caveat that there is no way to know. When I look at Netflix, I see a whole world of content and people they have yet to reach. I see a world where Netflix delivers the World Cup to a rural village's screen set up in the mountains of Peru.
I see a catalog of Russian soap operas spreading across the frozen tundra of Siberia due to internet provided by a tiny satellite. Or maybe it is all priced in and the 400 P/E ratio will slowly contract and virtual reality television will put the nail in Netflix's not yet built coffin.
So yes, this investment thesis has all the classic symptoms of chasing a stock after an enormous run. But my point is, whether due to the lack of other things to chase or the lack of a large inheritance with which we can live off of 1.5% CD yields, we have to chase Netflix here.
The roller coaster ride we are embarking on is not a bad way to spend our limited time on this planet and it may pay off so handsomely we can build a real one!
It is mightily hard for me, given my time horizon, to ignore the opportunity that is Netflix. While there is certainly no need to bet the whole farm, what will I do if I ignore Netflix and it turns out to be the next "ten bagger."
The potential is certainly there, although it will require a fist full of time and money to be met. So I ask unto you, dear reader, can you ignore the future?
Do you feel confident that your crystal ball does not envision those red and white letters at the top of the S&P 500 index?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.