Every company that today sells widgets would like to have their business be one that simply bills customers on a regular basis, with the predictability and surety that Wall Street loves in a business.
Netflix (NFLX - Get Report) is that business model, the one to which every tech giant aspires, but that they achieve only to a limited degree. Netflix's entire reporting structure is a nice, simple model of fees from subscribers, which grows in a straight line, quarter after quarter, a model of progress, a word used often in the Netflix quarterly shareholder letter.
By contrast, the tech giants, Alphabet (GOOGL - Get Report) , Amazon (AMZN - Get Report) , Microsoft (MSFT - Get Report) , Apple (AAPL - Get Report) , and Facebook (FB - Get Report) , and Tesla (TSLA - Get Report) are widget sellers: they mostly sell widgets, either in the form of discrete product or in the form of inventory of advertising, which is, again, just widgets.
That's why the most prominent product moves by all the tech giants have been heavily in the direction of subscriptions. Google did this recently with its announcement of a streaming gaming service, "Stadia." Apple, of course, on Monday is expected to unveil a long-awaited media streaming service at an event in Cupertino, along with an Apple News subscription service for which it has been pursuing deals with publishers.
By and large, though, the giants have a very long way to go to achieve the simple proposition of Netflix's subscription empire. Almost all of Alphabet's revenue, for example, is the Google advertising business, a business of selling units, in the form of click-throughs, which vary in price per unit as the company's auction market varies quarter by quarter. Subscriptions to its YouTube property are just a drop in the bucket, at this point, as it is still mostly an advertising platform.
The same is true, generally, for the majority of Facebook's revenue, a price-per-impression or a price per click.
Apple's services revenue, including its Apple Music subscriptions, is expected to make up 18% of revenue in the fiscal year ending this September, which would be up from 14% a year ago, but which still leaves a lot of revenue from selling units of things (units Apple no longer discloses in the case of its single biggest product, the iPhone.)
For Amazon, its Prime membership service is still just a fraction of revenue. The company doesn't disclose how much, but FactSet estimates are for this year to see a little under 7% of the company total of $275 billion coming from subscription-based offerings.
For Amazon, cloud computing has the potential to be another, very high-margin source of subscriptions, though to date, its AWS cloud computing service is mostly a pay-per-use deal, with customers buying computing time by the second, and being billed monthly.
Microsoft's shift from selling software by the disc to selling long-term licensing agreements happened before it became a cloud computing titan. As a result, it stands the company in much better stead than its mega-cap brethren. Although its Azure cloud computing unit is different from those traditional subscription license arrangements, Microsoft incentives customers of Azure with deals if they sign longer-term agreements.
And Microsoft has a gaming empire in Xbox Live, a subscription service. Microsoft's $24 billon acquisition of LinkedIn, in December of 2016, was a rather pricey bid to add a subscription business of scale to its wares. Its purchase last year of developer portal GitHub could be something similar over time.
None of these jumble of efforts by the tech giants can compare with the simplicity of Netflix, and Wall Street loves simplicity, which is the parent of predictability, which Wall Street loves very much.
Never mind that Netflix has billions of dollars of debt in the form of actual bond offerings and off-balance-sheet content obligations: it's worth it, in Wall Street's eyes, to have the steady growth of subscribers over time.
Netflix has even managed to erase the word "churn" from its earnings reports. The company discloses "net" additions to its subscriber pool, but it never says how many gross subscription adds it takes to generate those net additions, effectively silencing the fact that some people simply leave the service.
You can see Wall Street's appreciation in Netflix's forward multiple of 56.5, more than twice that of Microsoft's 23.6 times, or the 18.6 times average multiple of Apple, Alphabet and Facebook. Amazon's forward multiple of 44.6 has always been sky-high, and Tesla, at 27 times, enjoys its customary premium as a startup company.
With the diversity of Apple's and the others' offerings, they'll never achieve the same pristine, simple subscriber structure of Netflix. The best they can do is to hope to attach enough other kinds of offerings to bump up the subscription portion incrementally. Tech giants mint money, but Netflix is Wall Street's love affair.
Amazon, Facebook, Apple, Microsoft and Alphabet are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.
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