Javier Lovato From Blind Squirrel Discusses Netflix

Summary

• Following a weak Q1, questions on competitive intensity and content quality have remerged for Netflix.
• Javier Lovato discusses his investment thesis for Netflix, including why those concerns are overblown.
• Topics include capital allocation and Netflix's huge international lead.

Javier Lovato from the Blind Squirrel comes on the podcast to discuss his post on Netflix (NASDAQ:NFLX), including why Netflix's scale is a massive moat, why the "Netflix doesn't do have quality" debate is wrong, and why Netflix is years ahead of their competition.

Blind Squirrel's Netflix Write Up

Chapters

0:00 Intro

1:25 Why is Netflix a good investment?

7:25 Netflix's relationship with creators

14:05 Where is Netflix's Game of Thrones

21:50 Does Netflix's weak Q1 indicate competition is gaining on them?

39:30 Why'd Netflix stop disclosing churn?

41:35 Netflix cost of capital and share repurchases

48:15 Opportunity cost of Netflix versus Disney, Spotify, or legacy media

51:30 Does Netflix need to get into video games?

Analyst’s 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.

Comments

[skylerbird]

Hope so I shorted it today.

[nerd_rage]

VIAC just had a strong quarter. The global competition has yet to take shape so it's far too early to say how NFLX will fare against several competitors coming at them.

[KidIcarus]

Read through his write up and he has a lot of valid points in support of NFLX in addition to your interview. Growth in foreign markets / countries seems to be a driving factor I’ve heard elsewhere, too. Phenomenal that a writer writes a book which becomes a video game series which is turned into a NFLX original series (Witcher with Henry Cavill) which then brings the book onto the NY Times best seller list 20 something years later! Personally, I think the quarterly earnings report of reduced new subscriptions was less important than the realization that the pull forward of some 35m new subs during the pandemic is not going away. In other words, as the pandemic lifestyle seems to be reverting towards normalcy here in the US, the 35m subs are staying. Much cash increase, earnings and revenue exceeding expectations, share buy back. Looks good to me.

[nerd_rage]

The way Game of Thrones fans talk about Game of Thrones, NFLX should avoid having their own Game of Thrones like the greyscale plague.

[Aceinmysleeve]

@nerd_rage If Netflix reshot the last season they'd be heroes forever

[dankii]

bullet points required desperately....

[nerd_rage]

@dankii I'm just listening while I do other things...

His main point is that NFLX's advantage is efficiencies of scale. Wow. We haven't noticed.

That might have been a great insight five years ago but the news right now is that NFLX's scale advantage may be evaporating fast. NFLX has 208M subscribers, Disney+ has 100M (growing at a far faster pace than NFLX ever did) and Amazon Prime's video viewership is 175M, a number that floored me.

Everyone else is way back in the dust, but HBO Max in particular could turn things around. AppleTV+ is carving out the "premium content" niche for itself and could be a major force in Emmys and Oscars in coming years. They may not rack up hundreds of millions of subscribers, but they could start to dominate buzz.

There was some discussion of "where's NFLX's Game of Thrones," but the answer was, "well NFLX will churn out a ton of stuff" and that will create "the next Star Wars" using the infinite number of monkeys approach, I guess.

If that were true, then why hasn't NFLX created the next Star Wars by now? They'e been churning out massive amounts of content for years now. No big franchises yet. What's going to change and magically make it happen?

They discussed the competition but the guy just dismissed them as "mainly US based." Well except for the biggest ones, Disney+ and Amazon Prime. And any competitor that succeeds domestically will of course go global, so we have to assume the streaming battlefield will be a global one, and the battle is already underway.

Some discussion of "aggregators" of content like ROKU being a threat. I guess it's a general threat - especially if they are free - but YouTube is the biggest aggregator imaginable, but NFLX still managed to thrive.

Some discussion about whether NFLX should get into games. For that, it would help for them to have some real franchises. I could see Disney+ getting into games faster. Watch the new Ahsoka Tano series and then play the Ahsoka Tano game that takes off from some plot point in the show, something like that, then it would make sense for the show and the game to be accessible in the same interface. Otherwise, why abandon the gaming platform you already use?

They didn't address the essential question: whether NFLX's recent weakness is really a sign that the crunch is on. Maybe right now is Peak NFLX and it's all downhill from here.