What is the stock?
Netflix (NFLX US).
How long have you held the stock?
Netflix has been held in the Munro Global Growth Fund since December 2017.
What do you like about it?
Firstly, Over The Top (OTT) video streaming will become the dominant form of video consumption and it is our strong belief that Netflix is, and will continue to be, the dominate OTT video platform globally.
Netflix will grow its leadership position in OTT because of the considerable network effects that surround digital businesses. That is, Netflix’s leading content library drives subscribers to the platform, who stream for more hours, which allows Netflix to grow its revenue base, which in turn allows it to reinvest more in content. And so the network effects keep rolling forward for the company allowing it to become more dominant.
Secondly, Netflix has a very large Total Addressable Market (TAM) to grow into. At just 7% of the US$90 billion pay TV market in the US (its most mature market globally), Netflix is closer to the beginning than the end of its runway. Further, at 120 million subscribers globally, Netflix is in just 10% of the 1.1 billion broadband connected households around the world.
How is it better than its competitors?
Netflix has severely disrupted the traditional pay TV and ad supported free-to-air TV models to the point where younger generations cannot comprehend the ‘cruelty’ of ad breaks or non on-demand viewing. Netflix’s significant content, marketing and technology investments have allowed it to become dominant globally. It will continue to lift spending from already high levels (c$ 10billion in 2017) to ensure it maintains and grows an unassailable lead over its peers.
What do you like about its management?
Netflix’s management are the pioneers of the OTT video streaming industry and have understood the need to invest heavily in content, technology and marketing, to build its lead. For us, management’s decision to invest heavily is based on long-term objectives and aligned management. We note that Reed Hastings (CEO) owns 5.5 million shares (US$1.9 billion) and this provides a very powerful incentive for management to ensure they invest to stay number one.
What is your target price?
Target Enterprise Value (EV) of US$420bn in 2027. EV today of $170bn.
At what point would you sell it?
While Netflix has a very long runway for growth, we need to ensure that the share price is reflective of the company’s progression relative to our key assumptions.
For example, under our base case assumptions we currently view that Netflix can grow from 120 million subscribers today to 300 million in 2027. We will continue to monitor the company’s subscriber growth to determine whether the share price is based on reasonable fundamentals or market over exuberance.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
Netflix has added 137 basis points to the Munro Global Growth Fund since the initial purchase in December 2017.
Where do you see the value?
Netflix has continued its geographic expansion and is now available in every country except China, Crimea, Syria and North Korea. It is currently targeting the large Indian subscriber market by building the local content library. Netflix has made considerable progress in its foreign language titles in recent years and so has a good foothold in Latin America and continental Europe. A challenge for Netflix is getting its content to “travel” particularly into the large non-English speaking emerging markets.
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