(Veteran tech analyst Jon D. Markman publishes Strategic Advantage, a lively guide to investing in the digital transformation of business and society. Click here for a free trial)
One of the biggest errors investors make is zero-sum gaming everything. If Disney ( (DIS) - Get Report) enters streaming that must be the end of Netflix ( (NFLX) - Get Report), for instance. Ah, not so much.
Netflix executives reported after the close Tuesday that 2020 sales reached a record $6.6 billion. Shares surged 15% today to a new high. The Los Gatos, Calif.-based media streamer is best of breed.
Yet investors get it wrong, quarter after quarter.
The reason for this is the idea that a market – whether it is smartphones or subscription video on demand -- can only support one company. Investors make this silly bet continuously despite all evidence to the contrary. I’m always shocked the argument surrounds Netflix.
It’s not easy to do the things Netflix managers have accomplished. They built a reliable platform that accounts for 13% of internet traffic, day in, day out. The billing system processes payments all over the world in numerous currencies and reliably keeps tracks of 204 million paying subscribers, up from only 100 million in 2017. And they are doing all of this while continuing to grow and produce content internationally.
Disney is a great franchise with enviable brand recognition and capable managers. The company even planned ahead by buying BAMTech, the firm that previously ran the broadcast operations for Major League Baseball. However, even Disney is no substitute for Netflix.
We know this because despite the competition from the house of mouse, Netflix managers raised subscription prices in 2020, and the firm still managed to add 8.5 million new members in the final quarter of the year. That figure was 2 million more subscribers than the consensus estimate, according to FactSet.
Higher subscription fees invariably contributed to the company being cashflow positive for the full year. Reed Hastings, chief executive officer, said in a letter to shareholders the business was $1.9 billion in the green through the end of 2020, a first. He noted the better balance sheet could lead to a decision to return cash to shareholders in the form of share repurchases.
It’s not that shareholders should complain.
Netflix has been a super stock. It’s been a decade since Hastings spearheaded a transition to streaming. At the time the company was in the mail order DVD rental business. It made no content and subscribers were dependent on the United States postal services. That was 2009. Shares have advanced 12,000% since then.
Getting the company to cashflow positive is a major accomplishment. It means the company can pay down debt. Netflix has borrowed about $15 billion since 2011.
The longstanding bearish talking point -- Netflix still loses money when its massive programming costs are taken in account -- is dead.
Ironically, cash burn is a big problem for some of the businesses traders see as would-be Netflix-killers. It’s hard to know how long competing SVOD firms such as HBO Max from AT&T ( (T) - Get Report), Peacock from NBC Universal, Discovery+ from Discovery Inc. ( (DISCK) - Get Report) and Apple TV+, an Apple ( (AAPL) - Get Report) business, can survive in their current configurations.
Sooner or later they are likely to succumb to a different model. That’s extremely good news for the Trade Desk ( (TTD) - Get Report), the programmatic digital advertising platform for all properties not owned by Facebook and Google.
I have been writing about Trade Desk a lot recently. The stock is in a correction. I believe it is extremely attractive at slightly lower levels.
All of that aside, the Netflix results are a lesson to investors about scale and competitive advantage.
Netflix is wining SVOD because of network effects. People watch a program like “The Queen’s Gambit” and tell a friend. That social aspect keeps subscribers engaged. Members can’t give up their subscriptions because doing so will leave them out of the loop. The greater the number of subscribers, the more valuable the service becomes to those users.
Longer-term investors should buy Netflix and Trade Desk into weakness..