Bears will wonder if Mr. Market overprices Netflix (NXFL) because he paid $422.67 for its shares on 26 July 2023. In contrast, Mr. Market paid $85.86 for Disney (DIS), and $128.15 for Amazon (AMZN) on the same day.
Similarly, Mr. Market paid $42.91 for Comcast (CMCSA) owner of Peacock, $12.76 Warner Bros Discovery (NASDAQ: WBD) owner of Max/HBO+, and $15.49 for Paramount Global (NASDAQ: PARA) on 26 July 2023. Hence, Mr. Market thinks Netflix is more valuable than its competitors. Why?
First, legacy media properties and other businesses do not hinder Netflix. Disney, for example, owns theme parks, a cruise line, two movie studios, the ABC broadcast TV network, and several cable channels. Paramount owns a movie studio, several cable channels, and the CBS broadcast network. Meanwhile, Comcast has cable systems, a movie studio (Universal), the NBC broadcast network, and several cable channels.
Netflix and the Idiot Nephew
Thus, Netflix does not depend on declining businesses, such as movies and linear television. Unlike Bob Iger, Netflix Co-CEOS Ted Sarandos and Greg Peters don’t have to worry about TV ratings, merchandising, movie box office, and theme park sales. Instead, all Sarandos and Peters have to worry about is the number of subscriptions and advertising.
Hence, Netflix (NFLX) is a far simpler business than its competitors. Thus, there is far less that can go wrong at Netflix. Netflix comes close to passing Warren Buffett’s “idiot nephew test.” To explain, Buffett likes to invest in businesses so simple, somebody’s idiot nephew (or niece) can run them.
Conversely, Disney, Paramount, Comcast, and Amazon each rely on several complex businesses. Paramount, for example, operates a movie studio, cable networks, a broadcast network, broadcast stations, and two streaming services (Pluto and Paramount+). Similarly, Amazon operates fulfillment centers, Amazon Web Services (AWS), a gigantic fleet of vans, a fleet of trucks, a fleet of airliners, a robotics company, and two streaming services (Amazon Prime and Freevee).
Netflix Makes Money
Conversely, financial data casts doubt on the idiot nephew hypothesis. For example, Netflix reported $8.187 billion in quarterly revenues, a quarterly gross profit of $3.514 billion, and a quarterly operating income of $1.827 billion on 30 June 2023.
In contrast, Paramount Global reported a quarterly gross profit of $2.301 billion, quarterly revenues of $7.265 billion, and a -$1.226 billion quarterly operating loss on 31 March 2023. Meanwhile, the Walt Disney Company (DIS) reported quarterly revenues of $21.815 billion, a $7.199 billion quarterly gross profit, and a $2.123 billion quarterly operating income on 31 March 2023.
Warner Bros Discovery (WBD) reported quarterly revenues of $10.7 billion, a quarterly gross profit of $4.015 billion, and a quarterly operating loss of -$557 million. Finally, Comcast (CMSCA) reported quarterly revenues of $29.691 billion, a quarterly gross profit of $16.910 billion, and a quarterly operating income of $5.646 billion on 31 March 2023.
Hence, Disney, and Comcast disprove the idiot nephew theory while Paramount and Warner Bros support it. However, skeptics will note all four companies generate enormous revenues and impressive gross profits. We don’t examine Amazon here because its other businesses are far outside of entertainment.
Disney has the most attractive business model because it generates enormous revenues, a large gross profit, and an impressive quarterly operating income. I consider Disney the value investment because its price is reasonable at $85.86.
How Much Cash Does Netflix (NFLX) generate?
Netflix (NASDAQ: NFLX) can generate enormous amounts of cash. For example, Netflix reported a $6.738 billion quarterly ending cash flow on 31 March 2023.
Conversely, Netflix reported a quarterly ending cash flow of $928.25 million, a quarterly operating cash flow of $1.44 billion, and a quarterly investing cash flow of $97.74 million on 31 June 2023. Consequently, Netflix had $8.577 billion in cash and short-term investments on 30 June 2023.
Comparatively, Disney reported a $3.236 billion quarterly operating cash flow and a $1.937 billion quarterly ending cash flow on 31 March 2023. Disney reported an $8.516 billion quarterly ending cash flow on 31 December 2022. The Magic Kingdom had $10.399 billion in cash and short-term investments on 31 March 2023.
Paramount reported a quarterly operating cash flow of -$378 million, and a quarterly ending cash flow of $2.109 billion on 31 March 2023. Plus, Paramount Global had $2.109 billion in cash and short-term investments on 31 March 2023. Warner Bros. Discovery reported a quarterly operating cash flow of -$631 million and a quarterly ending cash flow of $2.369 billion on 31 March 2023. Warner Bros had $2.651 billion in cash and short-term investments on 31 March 2023.
Comcast reported a quarterly ending cash flow of $5.577 billion and a quarterly operating cash flow $7.228 billion on 31 March 2023. Comcast had $5.535 billion on 31 March 2023.
What Value Does Streaming Offer?
All the streamers generate cash, but only Disney and Amazon have more cash than Netflix (NFLX). For example, Amazon had $64.796 billion in cash and short-term investments on 31 March 2023.
Netflix had $50.817 billion in total assets on 30 June 2023. Disney had $204.858 billion in total assets on 31 March 2023, Warner Bros had $130.584 billion in total assets on 31 March 2023, Paramount had $56.561 billion in total assets on 31 March 2023, and Comcast had $259.429 billion in total assets on 31 March 2023.
Thus, Netflix’s value resembles other entertainment companies. I don’t compare Amazon because entertainment is a sideline at Amazon. At Netflix, Disney, Comcast, Warner Bros, and Paramount, entertainment is the primary business.
For example, Comcast’s cable systems exist to deliver television entertainment to customers. Similarly, Disney’s theme parks entertain vacationing families.
In contrast, Amazon is in the cloud infrastructure, streaming, logistics, delivery, fulfillment, robotics, and retail businesses. I think Disney is the only entertainment company I consider a value investment. That it is cheap and makes money. Although I consider Amazon a value because of its cash.
Is Netflix Growing?
Netflix (NFLX) is still growing. For example, the number of US and Canadian Netflix paying streaming subscribers grew from 73.28 million in the second quarter of 2022 to 75.57 million in the second quarter of 2023, Statista estimates.*
Similarly, Netflix’s revenues by 2.72% in the quarter ending on 30 June 2023. Netflix’s quarterly assets grew from $46.351 billion on 30 June 2022 to $50.817 billion on 30 June 2023. Plus, Netflix’s cash and short-term investments grew from $5.819 billion on 30 June 2022 to $8.577 billion on 30 June 2023.
This data shows rumors of Netflix’s demise are exaggerated. I think Netflix’s growth will continue.
Can ad-supported streaming make money?
The only credible threat I see to Netflix’s streaming dominance is free ad supported television (FAST) services such as Paramount’s Pluto. The number of Pluto monthly active users rose from 64 million in fourth quarter 2021 to 78.5 million in fourth quarter 2022, Statista estimates.
Conversely, Pluto’s advertising generates far less revenue than subscriptions. To explain, Pluto’s revenues grew from $560 million in 2020 to $1.06 billion in 2021 to $1.11 billion in 2022, FourWeekMBA estimates. Hence, making money is difficult for advertising.
One problem Pluto faces is that its MAU numbers are for the entire world. Yet, many products are exclusive to one country. For example, GEICO and Progressive auto insurance. Obviously, GEICO and Progressive’s ad buyers don’t care if Pluto has tens of millions of viewers in India or the United Kingdom. Similarly, Procter & Gamble (PG) only sells Tide brand laundry detergent in North America and Russia. They call Tide Daz in the UK and Vizir in France and Poland, for example.
Hence, Pluto will need to demonstrate it can attract enormous numbers of American viewers to sell advertising on Madison Avenue. Thus, Pluto needs better technology or different programming. For example, an artificial intelligence or machine learning solution that identifies US viewers.
Another solution is programming attractive to American viewers. For example, Yellowstone reruns or NFL football. Plus, Pluto could target advertisers that need a global audience. For example, Coca-Cola (KO), McDonald’s (MCD), or some Hollywood movies.
Can the Hollywood Strike help Netflix (NFLX)?
Netflix (NFLX) could get a short-term boost from the Hollywood writers and actors strikes. Those strikes threaten Disney, Paramount, Comcast, and Amazon, which produce much of their content in the United States. To explain, the strikes have ended US and UK movie and film production.
Conversely, Netflix shows a lot of foreign programming. For example, Squidgame. Hence, Netflix can show foreign programs and movies that are new to American audiences. However, competitors can buy foreign shows and programming. Notably, Disney (DIS) has bought the global rights to Doctor Who.
Yet, I think it will take time for streamers to feel the strike’s effects. To explain, I suspect streamers and studios have many months’ worth of new programming on tape. Hence, they will have plenty of stuff to show for many months. Moreover, they can fill the gaps with stuff like reality TV, documentaries, news, game shows, sports, and pro wrestling.
Paramount could show Premier League Football (British soccer) on CBS, for example. Meanwhile, Comcast could show World Wrestling Entertainment’s SmackDown! and Raw on NBC. Thus, I don’t think the strike will have a big impact on streaming.
In conclusion, I consider Netflix (NFLX) an interesting but overpriced stock. My advice for investors is to avoid Netflix until its price falls to a reasonable level (around $150 a share) or pays dividends. Netflix is not worth the price Mr. Market pays for it.
*https://www.statista.com/statistics/250937/quarterly-number-of-netflix-streaming-subscribers-in-the-us/#:~:text=Netflix%20reported%2075.57%20million%20paid,quarter%20of%20the%20previous%20year.
*https://www.statista.com/statistics/1127084/pluto-tv-monthly-active-users/
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