We Study Billionaires - The Investor’s Podcast Network - TIP376: The Value of Netflix w/ Arif Karim

Starting point is 00:00:00 You're listening to TIP. On today's episode, I sit down with R.F. Kareem to talk about Netflix. RF holds a degree in economics from MIT and is a senior investment analyst at Ensemble Capital. Netflix is an amazing example of a company with an incredible flywheel effect. A lot of people stated that Netflix would never be profitable, and yet they became cash flow positive in 2020 and claimed to be self-funding production from here. Today, we discussed the moat around Netflix compared to HBO, Disney, Amazon, and others, the amazing strategy for customer acquisition behind the growth, RF's intrinsic value

Starting point is 00:00:35 of Netflix, and a whole lot more. I love this discussion, and I learned a lot. It's amazing to see how these incredibly large and fast-growing companies may still have a lot of upside ahead. I hope you enjoy it as well, so without further ado, here's my conversation with RF Kareem. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you in full-investing. formed and prepared for the unexpected. Welcome to the Investors Podcast. I'm your host, Trey Lockerbie, and today we're super excited to have back on the show,

Starting point is 00:01:21 RF Kareem. Arif, welcome back. Hey, thanks, Trey. I'm so glad to be back. I'm a big fan of your show and chatting with you and the others as always a great thing for me. Well, you and I connected, gosh, it was back in September of 2020. for a little bit. And you were telling me about Netflix at the time. Man, I wish I bought some because it's done pretty well since then. And so I had to have you on the show and talk

Starting point is 00:01:47 a little bit more about the pick, how it's looking to you now. And I know a lot of our audience follow a lot of the Fang type of companies. And so it'll be interesting to check in on Netflix and see what your forecast looks like for it. Happy to talk about Netflix. It's an amazing company. We've followed it for a long time. and we continue to expect that they will continue to execute really well going forward. Huge opportunity in front of them. So, RF, I recently interviewed Robert Hagstrom, who in his latest book, broke down this evolution of investing into three phases, basically starting with Benjamin Graham Net Nets,

Starting point is 00:02:22 essentially, moving from there to do more of a discounted cash flow type of modeling. And then finally, evolving to understanding network effect type of companies. And that's where I feel like I've been transitioning into most recently. And Netflix appears to be a good example of a company with, you know, a strong network effect or maybe another way to put it is at least a strong flywheel effect. We use the Jim Collins analogy. So basically a flywheel effect where the more users generating revenue for the company equals higher quality content at a reasonable price, which then leads to more people coming

Starting point is 00:02:54 onto the platform and so on. I'm wondering if this is how you see Netflix, if this is what originally intrigued you about the company and how you kind of see that evolving over time? As Netflix grew subscribers, they had more revenue coming. They would take that revenue and reinvest it in both content to, and really content is the product. And any media service, content is the product. So they reinvested in content and they would invest a portion in marketing to go out

Starting point is 00:03:22 and add new subscriber. And so it became this flywheel effect, right? The more content you had, the better content you had, the more appealing your service was. and then you market to new subscribers, your content, and you'd add them, and then that bring me more revenue, and hence you'd have more money to reinvest in content and marketing. One thing that was really interesting was that, you know, there's another piece of this fly at will effect, which is that when you bring an incremental subscriber, you have incremental dollars to spend on more content.

Starting point is 00:03:51 That incremental dollar content spending benefits all subscribers, right? So every incremental subscriber benefits all subscribers, and that's the classic sort of network effect. phenomenon. So that's an inherent part of Netflix's core. And at the time, Netflix, and for many years, you know, since they made that transition from DVD to streaming, they basically reinvested as much of their, you know, dollars coming out of P&L into content and marketing as they could. And in fact, to accelerate the build of that scale, because nobody else was doing it's right. They had the market all of themselves, internet, global video delivery market. They had just

Starting point is 00:04:25 to themselves. They accelerated the build of that scale. by borrowing money at very low rates. I mean, capital was cheap, right? And the market was willing to lend to them at very low interest rates. And so I think the management was very savvy and smart in taking advantage of the fact that there's all those capital available to accelerate growth that scale, both on subscribers and content. And the bigger those two get, more scale Netflix has, the better service it can offer,

Starting point is 00:04:55 the bigger, the wider the distance between it and any legacy. media provider would be when the legacy media providers decided they would get into this business, which surprisingly took him a long time. It sounded like Jeff Bezos at Amazon talked about how Amazon had, I think, was a seven-year lead on cloud computing, you know, before anybody else started doing it. And he was just like, we were quiet about it because we didn't want to alert our competitors to her, right? I mean, we were surprised that they didn't come in and start doing the same thing, but we were

Starting point is 00:05:24 quietly building this great business. And the thing is, these kinds of businesses, when it's a new business, model, you need time to work out the kinks in that business model, right? Whether it's how do you acquire subscribers cost effectively, how do you retain them efficiently? How do you deliver service in a way that's, you know, and usually new services started kind of crappy in terms of quality. And we all know those from Netflix. I mean, when Netflix streaming first launched, when it was free, it was B-movies and it was not that good, right? Which is why it was free. So when Netflix made the change to basically start charging for streaming, you know, they believed in the future service as being this

Starting point is 00:06:03 amazing service that could be very convenient and cheaper than the, at the time, the current way that video content service was being delivered via wires. But it took a while for, you know, the quality of the service to get better so that, you know, when you press play, it plays, right? There was a lag. Similarly with Amazon in their AWS cloud services, it started below it. It kind of served, you know, sort of startups that were looking, but didn't have the money. to buy their own data centers. They can use Amazon service. But in that, you learn and you develop technical capabilities to improve the service

Starting point is 00:06:35 to the point where it's the classic districious and disruption where your service becomes the superior service delivered at a lower price. And all of a sudden, you're eating the lunch of the incumbents who are highly profitable, but underinvesting in both the service, the technology, and maybe even the content. Because today, if you look at Netflix, you know, they rival HBO, which historically has been kind of the top tier content guy in the business, but they rival HBO in terms of content quality and they rival and yet they have this huge amount of content as well, you know, that spans the gamut of I might be a, you know, a guy who loves high quality content that's, you know,

Starting point is 00:07:12 award winning, but you might be the guy that loves Adam Sandler, right? And that's what you care about. And so they span the gamut, right, of that. I love things about black holes. You might love things, you know, you might like stand comedy or you might like animation. So over time, they've expanded the types of subscribers that they can address by expanding and scaling their content. So, yeah, I mean, so all that together comes together to create the moat that Netflix has today. And the way I describe usually is that, you know, the number one thing when I think about the mode of Netflix, which most people don't think about, but increasingly there's more talk about it, which is that culture is a huge moat source that has not been talked about before.

Starting point is 00:07:46 In part because it's hard. You know who talks about culture as a moat source? It's BC's venture capital, Steve. Because they understand it's the people building a business that's all. all that relates to success, whereas historically value investors have thought about tangible assets as being the value of business. The value of business is not the tangible assets. It's how productive those assets are, whether tangible and today more and more so intangible.

Starting point is 00:08:08 And so that all comes down to people. They're managing the assets of the business and managing the productivity of the group of people working together every day to produce something. So it's that managing of assets and people produce something that customers really value. But as I delved into the space, a couple of things happened, actually. One was being a value investor, you know, the thing that looked most interesting to me was Time Warner because they owned HBO. And HBO is a global brand.

Starting point is 00:08:37 Everybody knows HBO. When you compare the multiple Netflix to a Time Warner, there's a huge disparity. Here you had Time Warner. They had this massive content catalog because they've been around for a long, long time. and they generated new content constantly, right? And then you had HBO, which was a premier network they had built out. They had large distribution in the U.S., something on the order of 40 million subscribers in the U.S.

Starting point is 00:09:04 And it was also being, its content was being distributed internationally as well via licensing. So they weren't making, you know, sort of a per subscriber fee so much as on the order of like U.S. subscribers, which was $10 to $15 per month. They were making more like a buck or two a month for, you know, sort of new, call it sort of loosely subscribers, you know, internationally. At the time, they talked about something like 120 million, you know, global subscribers. But really, it was licensing deals with international pay TV providers, licensing their content. They didn't have any sort of direct relationship with those subscribers. And so, you know, as luck would have it, Time Warner launched what was called

Starting point is 00:09:40 HBO Now, I think, at the time, which was their streaming service. This was in April 2015. And so we were all lathered up about this. You know, it's like, here's this opportunity. this hidden gem that Time Warner really wasn't getting any credit for. And I remember saying at the time that this is going to be great. The only thing HBO needs to do, the Time Warner needs to do is they need to go out and hire the deficiency they had, was being able to reach customers, directed customer, sort of over the internet type of skill set, I guess you'd call it, that I understood to be hard. I understood them not to have that necessarily, right?

Starting point is 00:10:15 So it was something you had to build out. And so I remember making this comment, they should just go hire the head of, Netflix's customer acquisition for whatever price it costs. They should just go out and hire them and they just spend a bunch of money to go get subscribers, right? Like, you get to scale. And, you know, over the next year or so, it was very disappointing. So when they did this, Time Warner concurrently, soon thereafter, I think they had an investor

Starting point is 00:10:38 day late in 2015 or mid-2015. And they talked about how they were going to invest money behind this effort. And they were going to, they cut their, you know, guidance for earnings. And I was like, great. I was down, I was happy about it because they were doing the right thing. They were investing in the streaming business that could be very lucrative and global. You know, cut forward a couple of months, a couple of quarters. And, you know, all of a sudden, Tom Warner was talking about, oh, our earnings came in better

Starting point is 00:11:03 than expected. Our costs were lower. And I was kind of scratching my head and thinking, that shouldn't be, actually. Whatever savings you have, you should definitely reinvest into HBO. And they were talking about how they're rewarding their shareholders now and, you know, returning capital, continuing to return capital of shareholders. And to me, it was just like, HBO had not grown that much. I mean, they'd grown, I want to say, out of memory,

Starting point is 00:11:23 maybe 500,000, 800,000 subscribers over the year, which was nothing different to Netflix, which was growing, I don't know, it was like 10 million or something like that, right, at the time. I, let me see if I can find out of the numbers, actually, but you basically had, so here, okay, so from 2015, when HBO now launched to 2017, you had them adding 800,000 subscribers in 2015,

Starting point is 00:11:45 1.2 million new subscribers in 2016, and then 3 million to 2017. And so the total of that is 5 million subscribers. On the other hand, Netflix added 17 million subscribers in 15, 19 million in 16, and then 24 million in 17. They added, what is that, you know, 27, 36 and 24 years. It's about 60 million basically, right? So 60 million compared to 5 million. I mean, it's just ridiculous, right, the disparity. right. Thankfully, we didn't wait until 2017 to discover this, right? This was kind of history, but we saw early on that Time Warner wasn't putting the type of resources we believed they needed to to really get HBO now going. And we felt like there was a window for this where you have to get to scale to compete with Netflix. Do you think that there was a difference in philosophy

Starting point is 00:12:38 there? Because obviously HBO is known for putting in just Deca millions of dollars into the content itself. I mean, Game of Thrones comes to mind. I mean, these are like unbelievable expenses. And are they just relying on the quality of the content to drive subscribership as opposed to maybe a different philosophy that Netflix had? Or is there any difference in approach there that you see? That's a great question. And that's where I was heading is that, you know, what you could see was that there was definitely a difference in management philosophy and culture. So to your point, you know, you said HBO is putting a deca a million into Game of Thrones and they're known for high quality content.

Starting point is 00:13:14 And I think it was maybe in the 2015 timeframe plus or minus a year where Netflix's chief content officer, Ted Serendos, they made this comment in an interview where he said that Netflix's goal was to become HBO faster than HBO could become Netflix. That was a really interesting comment, right? Because our bet was that HBO would become Netflix faster than Netflix would become HBO, right? That's what we're betting on when we own Time Warner. And it was entirely driven by kind of sort of this very nominal. of you of like the difference in valuation. Netflix was, oh, so expensive. And Time Warner was

Starting point is 00:13:49 trading at, I want to say maybe 15 times or anything or something like that, right? Around, you know, plus or minus a couple points. But what we saw when we got involved, you know, and they were paying attention closely to the media space was that the management at Time Warner was still stuck to this idea of what shareholders want is, you know, they want current capital returns, right? They want return of capital. This was the big theme from, you know, oh, 2010 to 2016 or 17 where large companies, and then I think this was, you know, activism in the early 2010s that drove them to be very much oriented towards returning capital shareholders, underinvesting in their own businesses.

Starting point is 00:14:28 But on the other hand, you saw startup cultures like Netflix's, where it wasn't a startup anymore, but it still had that culture of innovation and looking to add value with a customer and, you know, just a more dynamic, agile culture behind focusing on the customer experience, and delivering to the customer, what would be valuable and enjoyable for them. And then incrementally working to improve that over time. And so you're kind of building this. The moat ends up being at the end of the day delighting the customer, right? I mean, this is a term that I think Apple would be introduced or people have learned this

Starting point is 00:15:00 from Apple, that delighting the customer is a very lucrative business model, right? If that is your focus, it's very lucrative. On the other hand, traditional media companies like Time Warner, and we saw this with other media companies as well, you know, they were beholden to this legacy business model that was tied to cash flows coming out of the cable TV business. Now, at the time, if you looked at cable TV, I mean, you know, you had 200 channels you could watch. You paid 80 to 100 bucks a month for access to that video. And the average American, I think the statistics I'd seen were like, you know, watches four to five hours of television a day. But what you saw with Netflix was

Starting point is 00:15:36 that their customer engagement, if you look at their subscribers, their subscribers are spending two hours a day watching Netflix. They were highly engaged and yet they're only paying like 12 bucks a month. So for 12 bucks a month, you're getting two hours of high quality engagement as a customer. When you also, most customers also had cable television, they were paying 80 to 100 bucks a month for and we're watching maybe an incremental two to three hours on that. As the value proposition was vastly different, right? But coupled with that was this idea that people wanted access to video content, quality professional video content anytime, anywhere you want it on your iPad, on your iPhone, the legacy media companies were all about limiting access to content.

Starting point is 00:16:17 So you came to watch on a certain channel, this show that you're watching once a week, instead of being able to binge, you know, as you'd like. You had to watch it when they put it forward on cable television. You have to be there at a certain time to watch, as opposed to watch whenever you're free, whenever you want. You had to, you know, watch on your cable TV box, you need to your cable television box to access content as opposed to watching it anywhere. Now, some of the media providers, you know, like CBS, I think was one,

Starting point is 00:16:44 memories getting a little boy, but there were some that allowed, that had apps on your tablet, but they had just started to, you know, sort of implement, and you had this sort of TV anywhere kind of a thing where you could watch it anywhere. By the end of the day, the experience was plugee. It was, there was a lot of friction in it, and it was all about control, controlling the content because they were so afraid of people stealing content or sharing it with friends, and Netflix really was not. So these are all part of your question about what does it say about management and really inherently

Starting point is 00:17:13 culture of the company. It was all about the viewpoint of for the media companies. It was very much about profit maximization. I want to control my content because then I want to control the economics around that and I want to accrue more cash flow for my customers for myself. Netflix's model is more like we want to deliver a great experience for the customer. So we'll start with that and then we'll worry about the other parts later. And in the process, There's a bunch of learnings that they had, and I'll just throw out one that, you know, to me was fascinating, which is, you know, this idea of controlling your content, right? So going back to Napster, you know, back in the early 2000, when the music industry basically sued consumers for downloading music for free using Napster. It was about the media industry sort of learned from that that they needed ways to control their contents that it couldn't be stolen, you know, by customers. And that's well, I'm good, of course, right? You don't want that. But on the other hand, And with Netflix, their model was more geared around winning new, new customer. We want people to walk.

Starting point is 00:18:14 We want people to have access to our content. We want them to then want it. And then eventually they'll pay for it was kind of the belief. And so I like to think that, you know, when you shared your Netflix passport, with friends and family, what it really ended up being was a viral marketing strategy, really, for Netflix. So it had been in the news for a little bit. And I'll certainly on investor calls would ask about, you know, when would Netflix clamp down

Starting point is 00:18:38 on password share, right? When are you going to access this, you know, lost to revenue sources by clamping down? And Netflix has always been kind of, you know, danced around that topic, not really sort of like, they've never given like a direct answer to it and how they would address it or when they would address it. And from our perspective, that was just the company realizing this, but not necessarily wanting to publicly state it, is that, you know, when I share my password with my dad or my sister or my friend, those people are watching Netflix content.

Starting point is 00:19:04 And for Netflix, no incremental cost to them watching it. But of course, it could be incremental revenue that they're losing. However, when you look at Netflix's plans, their sort of standard plan allows you to have two simultaneous content streams. And so if there's a third person that tries to access it, you'll get a notification or they won't be able to get access to it. What will happen then is maybe you'll upgrade to their, you know, high tier where you have four to use streams.

Starting point is 00:19:30 So instead of controlling monetization by the number of users, Netflix was controlling monetization via the number of streams. And from a customer perspective, if your content provider comes to you and says, you are stealing content from us by sharing your password, right? That's wrong. You know, you're being a criminal. It's a very different experience than saying, oh, you used up all your quota of, you know, streams.

Starting point is 00:19:55 Would you like to upgrade, you know, to add more? And that way, it's like very easy to sort of be like, oh, I'll just upgrade or I'll split it with my friend or whatever. So anyway, I want to come back to kind of that flywheel of back. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the

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Starting point is 00:24:16 Back to the show. You're touching on the moat a lot, which is something I really am curious about because admittedly, I'm a customer of Netflix. I watch it probably right before bed almost every night with my wife. And I find it to be a resource

Starting point is 00:24:30 for very bite-sized type content. And I have so many questions around this. Well, the first one was, if you know anything about the strategy with comedy, because Netflix leaned in really hard early on with live comedy specials. And it kind of makes sense economically in my mind, right? Where it's probably cheap to produce, relatively speaking. You get a lot of value for little, and there's a lot of it out there that you could produce pretty quickly. But it's certainly become, I guess what I'm comparing that to is like, that's where I would think to go first,

Starting point is 00:25:02 rather than an Amazon. And I have other purposes for why we go to Amazon, which I want to get into as well. But I'm curious if you know anything about that strategy or what's kind of come out of that or how you kind of see the use occasion of Netflix versus some of the other platforms. Comedy is a good one to touch on. One of the nice things about Netflix's model is that they've focused on building scale on subscribers. And today they're the largest scale content provider globally, right, with over 200 million

Starting point is 00:25:31 subscribers. And of course, for Netflix, a subscriber is a subscription, right? Which means that there are probably an average, we're guessing here, but an average of, you know, two to three viewers of that contact for a subscription. When you have that level of scale and, you know, you can go back to, you know, when they have 60 million, 80 million, 100 million, you've got a diverse set of tastes amongst that subscription base. And so early on, you know, Netflix was able to get data because there's a two-way connection over the internet, they're able to collect data on what people are watching, how long they watch, and then create these profiles of sort of subgroups of consumers that they're addressing. And obviously, you know, things like comedy became a big

Starting point is 00:26:10 genre that led to success, you know, for Netflix and continuing to drive that flywheel of new subscribers joining and engaging really, right? Which also, you know, the higher the engagement, you can see Netflix then chases that with incrementally higher pricing. So yeah, I mean, comedy is one area that they've invested in. And although the production, cost might be low, what they pay the talent has been increasing over time. There's other types of content, too. I mean, Netflix, interestingly, going back to a comment about becoming HBO before HBO became Netflix, I mean, most recently in the last couple of years, Netflix has been rivaling HBO

Starting point is 00:26:45 on the number of Emmys they're contending for, right, which speaks to the quality. But at the same time, some of the most popular content that Netflix has is Adam Sandler movies, which are not really high quality, but people enjoy it, right? I mean, some of the most popular content on Netflix. And so to your point, they've built out these different genres. And most recently, animation has become, you know, kind of a big area of focus for Netflix as well. And then now feature content films are another. I think in their most recent caller or the call before, they talked about how they basically were to come out with, you know,

Starting point is 00:27:16 basically a new feature film every week. You know, so that every Friday, Saturday you have a film to watch, which is when most people watch movies. Which, again, is going kind of the HBO model, right? I think they'd said once that 60% of subscribers only watched movies. And they had first dibs on, you know, that window post theatrical release on movies across several studios. You asked an interesting question around, you know, how do you think about the ways that Netflix addresses content for their audience versus some of the other services?

Starting point is 00:27:46 A good example of this is every Friday, our family developed this tradition of family movie night. And we have a three-year-old son. And so my three-year-old son, We're kind of just like introducing him to all the classic Disney type movies. And I don't, to be honest, I've never really gone on Disney Plus and it's probably all there. But what's been easier for us is just going on Amazon, I can type in Frozen, rent for $3.99. And within like literally half a second that movie is playing.

Starting point is 00:28:14 It's so easy and sticky in that way. But a platform like Netflix is lacking in a lot of those classical movies that you can't access as easily. So I'm kind of curious about that distinction. And if that's intentional or if Netflix aspires to eventually own the rights to a bunch of content like that, or if it's just the motes are around the rights and they're pretty, you know, I know Amazon bought MGM brand, for example, specifically for rights. So is everyone just kind of carving out their own piece of the pie that'll be pretty defensible over time in your mind?

Starting point is 00:28:47 Our belief has been that while Netflix has been built this market and is the leader in the market, that at the end of the day, content is the product. You got this distribution service, and you can create a great experience in that service. But if you don't have the right content, then the service is kind of not really useful, right? Because the product is the content. And Netflix understood this, you know, early on,

Starting point is 00:29:12 I think when they tried to renew their first set of licensing deals, one was with Stars, where, you know, when they first got that deal, they paid something very low because they had 20 million, subscribers and Stars didn't really believe this was going to be a, you know, sustainable model, I don't think. But then when it came time to renew three years later, that deal didn't happen. And the rumor was that Stars wanted, you know, 10x fees to re-license. And that's kind of around the time that Netflix started its own initiative to produce its own content, original content,

Starting point is 00:29:42 kind of getting to this point, which is that they saw that over time as media companies that they were licensing from understood that Netflix was actually winning. meaning customer attention away from them via more lucrative channels or just cable television that they would start to limit content to Netflix, licensing content to Netflix, or charge exorbitant prices. And Netflix would be beholden to them. So fast forward to today. And you basically have pretty much every media company, legacy media company, has its own

Starting point is 00:30:11 service now available. And this was a moment that we were actually anticipating. But the key is to understand what those moat sources are for the different media company. So to your point, you know, if you have a three-year-old kid and you want to watch all the classic basically Disney movies, the way to go about it is either renting on Amazon or subscribing to Disney Plus. And when you think about the market, no company will have a monopoly on the best content in the world.

Starting point is 00:30:39 And that market for video content around the world is trillions, right? It's a huge, huge market. What you have is a transformation in how that content is being delivered, how it's being produced, what it costs. and in that we believe you can have a handful of global winners, but it's going to be global scale. It's going to be this duality of, you know, very large global scale players and, you know, this long tail of smaller, very niche content providers, right? And you or I will probably subscribe to two, three, four, you know, different subscriptions

Starting point is 00:31:13 to get the entire bundle of content that we want. Amazon has an interesting model in that early on, they've always been about selection. selection is the big thing with them, right? And so it's interesting that when you go on Amazon, so not only do they provide sort of free video to prime subscribers akin to like a Netflix where you're paying a subscription to, you're getting some set of content for free as a result, but they also have kept it open so that you can actually rent

Starting point is 00:31:40 content that's not actually provided on their prime platform. But then also you can subscribe to streaming services. Like, you know, in the past I've subscribed to Showtime via Amazon. And so they kind of just want to be the, marketplace for everything, you know, not just their own, just like in retail, right? There's things you buy from Amazon retail directly, but then there's all these third party retailers that also sell via Amazon. So for Amazon, they've got a bit, they've got a pretty unique model in that in that perspective. It's all about offering you the broadest selection of everything,

Starting point is 00:32:07 whether it's content or goods, whereas, you know, I think the most interesting launch in the last couple of years has been Disney, obviously, and it's one that we've been kind of waiting for. Like, when is Disney going to do? It's because when we thought about the legacy incumbents that, that would be potential competitors to Netflix. What became clear a couple of years ago to us was that Netflix had gotten to such a scale where it's because it's globally focused, that global scale market is a big market. And when you have the amount of revenue Netflix was bringing in, and you couple that with the rate of growth in revenue by bringing in new subscribers

Starting point is 00:32:40 and also incrementally raising prices. What you have is a player that can basically buy any tent pole content they want, as long as available to buy. And the thing to realize is that, you know, when you think about Disney, content or MGM content or Time Warner content, those guys are, they're kind of a middleman. They're a curator. Who really makes the content are the creators, right? The directors, the screenwriters, actors.

Starting point is 00:33:05 And Netflix has just as good a chance of winning those, that talent to produce for it as Disney does or Time Warner does because it has a scale. But there's a lot of other incumbent media providers in legacy media providers that just wouldn't have the scale because they're all regionally focused. Most media was regionally focused in the past, whereas with the proliferation of the internet, especially wireless, you've taken what used to be a regional scale business and made it a global scale business. And so if you can't make that leap to global scale, you're not going to be able to compete.

Starting point is 00:33:35 You won't be able to pay the price. So we're going to see big dollar prices, right? Like, oh, you pay, you know, we already see, you know, movies costing a couple, $200, 300 million to make. So you pay these high prices. But the thing is, the more subscribers you have, the lower the per subscriber, cost ends up being. And so the scale economics accrues to the largest players as a result of that for that best content, right? And that's what really pulls in new subscribers into your service.

Starting point is 00:34:01 I hope I've answered your question how to think about these different services. What is the best metric in your mind? Let's start with financials first and then talk a little bit more about business metrics. For a fast-growing company like Netflix, you mentioned earlier, okay, it was a PE of X. But is that even a consideration with something like Netflix? Obviously, the earnings, as you were saying, you're expecting them to reinvest those as they scale. You want them to. So should we even pay attention to PEs and then, or is it something like price to sales or any of the key ratios that you watch for high, fast-growing companies like Netflix?

Starting point is 00:34:35 Our way of figuring out the value of any business ultimately relies on what we expect for future cash flows to look like. And all businesses have various periods where they invest cash flow for growth. In a case of Netflix and lots of technology companies, they invest via the profit and loss state of the P&L, where it's investing in marketing or content, things like that, whereas company like Walmart or Home Depot kind of went through similar growth periods where they invested in stores. You don't expense a store, you actually depreciate it over some period, it's 20 or 30 years or whatever it is, right? And so you get this dichotomy in terms of how value is measured from an accounting perspective,

Starting point is 00:35:14 Because accounting rules are basically oriented towards kind of legacy economy, which is the tangible world economy, not necessarily the intangible world economy. Michael Mabusson, who's a great thinker in finance and financial modeling, talks about this in at least one paper, but I think it's more than one paper if memory serves. For us, ultimately, you know, the value of any business ends up being around the future cash flows that you expect. And so we've always had an expectation of like Netflix will scale when it gets to a certain scale, it'll start to then become. So it's always been profitable. In the market, this is in this

Starting point is 00:35:48 view that Netflix's so unprofitable, but it's actually not. It's been profitable. It's just that it's been cash flow negative. And what they've done is they recognize that they had a window of opportunity to become global player and a leader in the space that would drive scale for them, which would then help them build that mode, right, competitive advantage versus others. In order to accelerate that, they not only took their profits from their existing business at any given point time, but they also borrowed money to overinvest in that content. If you think about it, if you're going from being a U.S. business, which is what Netflix had been in 2011, 12, 13, basically, they had some international, basically a U.S. business to a global business.

Starting point is 00:36:29 Well, now you need to deliver content globally, you know, the type of content that people all around the world would need. And it's like the whole chicken and egg problem, right? You can't win subscribers in Korea unless you actually have Korean content. So you got to, build a content base first to make an attractive service for Koreans. Now, of course, you can augment that way, you know, U.S. Hollywood types content that has global appeal, but you will need some set of local content to win customers and then keep them over time. And so Netflix had to build this content catalog faster than its own profit and loss statement

Starting point is 00:37:03 could generate cash. So the whole idea that Netflix wasn't profitable is actually not quite right. It actually was profitable because content does have some depreciation cycle. It's just that it was borrowing money. It was cash flow negative. Our thought was always that once they, in fact, this is exactly what I said internally back in 2016 when we flipped from Time Warner, we sold Time Warner and bought Netflix because they had obviously the right strategy.

Starting point is 00:37:24 They were doing the right things. My comment was that Netflix is overinvesting in content right now. But if that overinvestment drives 20, 25% subscriber growth for the next three, four, five years, this is going to be a huge business. And at some point, they're going to get to the point where they can't, physically buy more content because it's just not available. There's a diminishing rate of return on content investment over time. Where that cutoff was was unclear.

Starting point is 00:37:52 This is something that we all kind of play by ear. Manor plays it by ear and we play by ear to kind of see at what point is incremental investment and content not generating new subscribers or new engagement. But at some point, it was going to be ridiculous. They were going to be able to spend so much money on content that it was going to be hard for them to actually buy good content. At that point, you're going to see the free cashless fall to the bottom. And so you kind of have to play out the business model, you know, over a decade to kind of see where that happens.

Starting point is 00:38:16 And for us, you know, we felt like that crossover was going to happen in that kind of 20, 23, 20, 25 timeframe when the company would go from being free cash flow negative to free cash flow positive and then grow tremendously from there. Our own thought was that they would be generating something in the, on the order of 30, 35, maybe even up to 40% operating margins, unclear, you know, exactly where it was going to be. Right now, we believe that it's probably going to be more like mid 30s as plus or minus point or two. But that was always a thought.

Starting point is 00:38:42 And then you basically discount that cash flow back. And that's how we arrive at our own sort of value for the business. Price to sales or PE. On the PE side, you know, one of the things we did is we also, you know, we thought about, well, what if you normalized pricing? Because it was very obvious that customers were receiving a lot more value from the service than they were paying. They were paying 12, 13 bucks a month.

Starting point is 00:39:03 But most customers felt it was worth much more than that. Just based on the end, you're engaging two hours a day, 30 days a month with Netflix at 12 bucks a month, you're getting a great, great deal. And then we also saw a history of price increases, you know, usually about a buck a year for the service. And churn would sort of spike a little bit in that quarter, and then it would settle down and the company would continue to grow, you know, massively in the quarters after that.

Starting point is 00:39:26 So if you normalize for that, we sort of arrived at the back of the envelope value of P.E. multiple of, in the high teens to low 20s, which seemed very, very reasonable when you look at, you know, the growth and the moat and and then the large global tan that was available to them. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business.

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Starting point is 00:43:18 Because what's so fascinating what you said earlier is, like, eventually they've just fully expensed this content. And then it's just pure profit. You had an idea of what that was at a certain subscribership. And then obviously they went profitable or cash flow positive in 2020. So earlier than you expected, did they just achieve? the same subscriber count earlier, or did they exceed your expectations on the operating side? Forecasting is an art.

Starting point is 00:43:41 No one knows the future, so we're all sort of giving it our best guess. But it's based on, you know, you try to anchor it on reality, right? So we saw that media companies in general had kind of scaled media companies at high 20s type operating profits in their media businesses, and some even higher potentially. This was going to be a global business, global scale, so it potentially could be higher than that even. And then, you know, we saw the momentum that Netflix's business had. And the way I thought about it was that this goes back to that conversation about, you know, HBO needing to hire the head of subscribers acquisition at Netflix is that they have figured out a formula over a decade. Their DVD business was all about acquiring subscribers online.

Starting point is 00:44:23 And you have to do this cost effectively, efficiently. You have to retain those subscribers to make the economics work. So Netflix had been at this game honing how you do that online for a decade before. they went to streaming. And then there it became sort of on steroids, it got juiced up even more. And it went global. It wasn't just the U.S. anymore. It was global.

Starting point is 00:44:41 And so that's a capability they had developed that pretty much every other incumbent didn't have that capability. I mean, new tech kind of companies had it, you know, like an Amazon, but not Disney, not Time Warner, not CBS. So there was some level of faith. They were printing roughly two million subscribers a month that they were adding. And this is lumpy, right? because we've seen over time, you know, every time Netflix, you know, misses their subscriber number.

Starting point is 00:45:06 The stock is always volatile. It's always down 10, 15 percent. The market getting nervous or just short-term investors, buying, selling, shorting, you know, whatever it is. But what we saw is that if you look at it from a 12-month perspective, a roll in 12-month perspective, it had been pretty consistent about adding something on the order of 2 million subscribers per month plus or minus. The sources of those subscribers were different. Sometimes it was, you know, a little bit more heavily ways of the U.S., sometimes it would be Europe, sometimes Asia. but you saw this sort of consistent overall addition of subscribers.

Starting point is 00:45:35 So we sort of just played that out and said, okay, so if they could continue. And in the U.S., they had something like 50% market share of households. So we looked at the U.S. as being a mature market. We weren't expecting much subscriber growth there because once you get past half of all households, and then, of course, you've got, I don't know, maybe 10 or 20% other, you know, sort of people that are sharing passwords with the subscribers. So you might realistically have 60, 70% market share in the U.S. There, we felt like the big growth we've come from pricing, just raising pricing a dollar

Starting point is 00:46:06 a month for several years until they got to a spot where customers resisted. It doesn't feel like to us we've reached that yet. Have you done any surveys about that? I'm curious, like, have you estimated how price-insitive the customers are, how elastic the price might be for Netflix? We haven't done surveys, but we've seen other people's surveys. You know, so there's a service called Bespoke. We're not direct subscribers, but, you know, they'll put up things on LinkedIn,

Starting point is 00:46:31 where they'll put up, you know, charts of what customers think of price increases or how they view Netflix. But for us, surveys are interesting, but the data is what really matters, right? Like when it comes down to it, you see, like I said, in the past, you've seen, you know, a little bit of a spike in churn, the quarter after price increases happen, and then it just kind of goes back to normal. And so when you compare like a year later, Netflix has grown subscribers on the back of those higher prices.

Starting point is 00:46:55 And so effectively, that tells us that Netflix subscribers, by and large, I think it's worth more than whatever they're paying for it, even after price increases. And one way to think about it is that if you're watching two hours a day of Netflix for 30 days a month, at 60 hours of Netflix a month, and at whatever, $12 a month, $13 a month, $15 a month even, it's less than the cost of a cup of coffee, right, every day. But the caveat to that, in my opinion, and it's ironic because all these companies disrupted cable, But you start to hit a threshold, I think, where in aggregate, the cost you're spending on content is what you start considering. Right? We're at a certain point, you're like, well, I've got Netflix, I've got HBO, I've got XYZ. And all of a sudden, I'm spending 120 bucks a month on content. And I used to spend 80 on cable.

Starting point is 00:47:42 I'm wondering if that's a thing of the past or if customers will be sensitive in that regard, like in aggregate and then start cutting from there. It's a great question. And it's an open question that we're waiting on. I mean, our viewpoint is, you know, once Netflix became the HBO of television, its next goal is to become television of television, right? So basically, you just go to Netflix to watch all your content. On the other hand, people have various tastes and every household has a few different household members that might have different types of content preferences.

Starting point is 00:48:12 You know, going back to your question about comedy, right? The different genres that Netflix is added over time, that's all investment in content. That's all investment in trying to engage as much of your attention across your household as possible because eventually Netflix wants to be the $25 streaming service or the $30 streaming service you pay a dollar a day for all of your TV needs from them. And while, you know, many people have this sort of nostalgia for Disney cartoons or Star Wars or Marvel, which are great, right? Obviously, they mean, huge amounts of money they make on the musical releases and then the engagement they get from customers. But if eventually you just come down to basically Netflix and Disney that cost

Starting point is 00:48:52 you 40 bucks a month, let's say, maybe 50. But look at the type of content you're getting, right, the quality of content between these two services. I mean, it's pretty amazing, actually, compared to like the majority of the content that you get on cable television, right? I mean, it's huge step up in quality. But at the end of the day, you know, from our perspective, and I think this is true of Netflix's perspective, they want to be your television service, right, at 25, 30 bucks a month. And what we think about it is that Netflix, and surveys have shown this, that most subscribers is streaming, think of Netflix as kind of the base platform service they start with, and then they'll incrementally add other services depending on the content they want to watch.

Starting point is 00:49:28 So when billions is on showtime, they'll be, they'll add billions, you know, showtime for a couple of months, watch billions, and then they're kind of done, they'll stop subscribing to that. And then maybe when there's a new Marvel movie, they'll go to Disney and they'll, you know, subscribe to that. If you have kids, then Disney's a lot stickier. But as an adult, I mean, you run out of content on Disney pretty quick. And this is the other part of the flywheel, right? And Disney obviously has learned this and knows this and they're investing in this.

Starting point is 00:49:52 But the part of the flywood, coming back to that topic earlier is that the more subscribers you have, the more revenue have, the more dollars you have to invest in content, new content, which then engages your current subscribers and draws new subscribers, which brings more revenue, which gives you more content dollars to spend on new content. So it's a cycle. Disney has been a phenomenal success. And I make the argument that I really admire Disney because they were late-ish to the game. I was surprised how long it took them to get into the direct stream business because along with HBO, Disney was the other one that has a global brand recognition.

Starting point is 00:50:24 They've got, I mean, as you mentioned, right, this IP, the catalog of content and brands and franchises they have is incredible, globally known. And, you know, I have to hand it to them. I mean, they did an incredible job. Disney always comes across as a company that talks about premium content that they have, right? There's various companies to talk about it. But Disney really does have premium content. And you would expect traditionally that someone like a Disney would be arrogant enough to say that, oh, well, because we have premium content, we're going to come in at a premium price.

Starting point is 00:50:52 And yet they were not arrogant. They were very, very smart. I like to say they were so smart. They actually copied Netflix's playbook step by step. So what did Netflix do? They priced their service very low to make it a no-brainer for you to subscribe. They made it very easy for you to subscribe, very easy for you to cancel. No contracts.

Starting point is 00:51:12 No issues about that, right? You can come back whenever you want, make it really easy. In the process of getting you the experience that they wanted to deliver, they built out their own CDN network, which is a content delivery network, so that whether you're in Brazil or Germany or the U.S., when you hit play for a sort of piece of content, you get it pretty much instantaneously.

Starting point is 00:51:35 And whether it's broadband where you have 100 megabits per second network speeds, or on your phone, you know, when you're out on the train, on the subway at 4G speeds or 3G speeds, you know, it's pretty seamless how quickly that content loads and start playing. In order to deliver that, there's a huge amount of back-end network work that you have to do that. Netflix did pretty early on. What did Disney do?

Starting point is 00:51:56 They acquired Bamtech who had built this out for sports and then leverage Bamtex CDN basically to be able to do the same thing. Netflix has built out this huge content catalog organically. They, like I said, the people in the market, investors in the market have criticized Netflix for borrowing all this money, you know, to the tune of $11, $12 billion in order to invest in content, build out this content.

Starting point is 00:52:19 Disney went out and bought Fox to build out the scale of its content. So all in all, like one more thing is that that low price, Disney went with this low price when they launched. And it's because they want to make it really easy for you, deliver tons of consumer surplus to you to subscribe and then stick around, wait for new content. Instead of saying, oh, you know, I'm paying $15 a month for this and I haven't watched anything new in a month.

Starting point is 00:52:40 I'm just going to cancel. But if it's $6.99, well, let's give it another month. We'll just kind of forget about that, right? And so Disney picked up all these different tactics that Netflix had used to succeed in building out of scale to do it for itself. And now look at Disney today. Over 100 million subscribers in a couple of years. This is like unimaginable.

Starting point is 00:52:58 It's incredible, right? So Disney was very smart. They were very humble, humble enough to copy Netflix, you know, pretty much play by play to let their service. In time, we think that, you know, what will end up happening is you'll have probably three, four, maybe five global services, depending on your economic situation and your interests. If you're in the developed countries, maybe you'll subscribe to three of them for something like 40 or 50 bucks a month in total. If you're an emerging market, maybe one. Maybe you share

Starting point is 00:53:26 a couple between friends or family where you share passwords. I think that'll be part of it. But at the end of the day, if the business model revolves around continuous streams being delivery, I think the business model works really well actually and actually expands the market for video content because there were once large swaths of the world, it couldn't afford to pay $20 a month or $50 a month for quality professional content. And now if you're sharing, you know, Disney and Netflix and maybe a third thing amongst, you know, for five, each, you know, sort of two, three sort of simultaneous streams, you're each basically ending up paying, you know, like $5 a month maybe for all this amazing content, right? So the value proposition goes up, the market

Starting point is 00:54:06 Its size expands and you have space where I think, you know, something like three global winners as a result. How should we think about the amount of debt that Netflix carries? Obviously, you're not too worried about it with cash flow positivity now and they'll be able to start winding that down. But obviously, all this content generation is expensive. So how do you think about that? Now that Netflix has transitioned to guidance that management has given us, they no longer

Starting point is 00:54:33 will have to go to the market to raise debt. If they do, it's going to be opportunistic. pretty much what Netflix is saying is that they've gotten to the point in their scale where it's self-sustaining in terms of the content investments they have to make. And as they continue growing, we think they've also guided to, they're going to do something like 20% operating margins this year. That's what they've guided to. And then they expect to keep growing that by about 300 basis points. So 3% additional operating margin points every year going for the foreseeable future. And then for us, that means, you know, in five years, you've added another 15 points of margin.

Starting point is 00:55:05 that's 35%. That's kind of how we think about where the ultimate margin goes to. And so the way that we think about incremental revenue is that when they bring on an extra subscriber, you buy content with that incremental content, that incremental revenue stream. When they raise prices, that falls to the bottom line. So there's this network effect and also this economic effect. So on the network effect, every additional subscriber enables Netflix to buy more content that benefits all subscribers in the base. That's the network effect, right? Incremental customer benefits

Starting point is 00:55:39 everybody. The economic effect is incremental dollar revenue generated by a price increase falls directly at the bottom line. And that's roughly kind of how we had modeled and that's roughly how it's kind of played out. And so that incremental dollar every month over a subspiver base of 200 million plus ends up being incremental $200 million dollars per month every time they raise pricing by a dollar. Our thought is that that when you work out the numbers, you're going to end up with free cash flow. Well, A, we think that over the next decade, Netflix is going to double its subscriber rates, right? So if something in the, you know, 2028, 2030 timeframe, you'll have, you know,

Starting point is 00:56:17 400 million subscribers rather than 200 million. In addition, we think that price will increase by roughly about a dollar a year. That ends up being something on the order of 7% a year. Price increases, Kaker. And that ends up creating a revenue stream of about $90 billion in, that timeframe at roughly a 35% operating margin. Again, these are all rough numbers, right? Like, no one can predict exactly the future will look like, but we think these are reasonable numbers from our perspective. And that will generate something on the order, you know, 18, 19, 20 billion dollars in free cash flow. So a lot of their debt comes due way out in the future, you know, a few years out. And so I think the total debt today is on the order of $14 billion

Starting point is 00:56:57 if memory serves, $14, 15 billion. So, you know, being able to manage that sort of a debt load is fairly easy from that perspective. In fact, we think that they should actually borrow more money over time and do more. So what more could they do? How do they add value? And this is one of the things that we think a lot about. I mean, when I think about ultimately, and this goes back to my comment about which is really where the insight sort of formulated was watching how the traditional shareholder focused company like a Time Warner focused on shareholders, profitability. shareholders care about profitability to the extent that they were actually

Starting point is 00:57:33 offering their consumers less and less value as a result. On the other hand, you had Netflix, which focused on a consumer and tried to address their value, and in the process, create a bunch of value for shareholders. Two very diametrically opposed viewpoints of how you approach strategy and building a business. And so I really like that idea of the role of a company

Starting point is 00:57:53 is to create value for their customers. And in the process, also share that value with employees, stakeholders. So it's employees, it's partners. In this case, it's content creators. And there's been different profiles of high-profile content talent that have gone to Netflix because they were easy to work with, better economics, you know, just all sorts of cultural things that they got more freedom

Starting point is 00:58:14 from Netflix. It's like it was like a win, win, win. It's like you got more freedom, more money, larger viewing audience to watch your content, right? If you want to win subscribers. So, I mean, anyone who makes content, that's what they care about. It's like, how many people watch my content, how much money will I make, and how much creative freedom will I have to make?

Starting point is 00:58:29 that content. And Netflix offers the best of all those worlds, right, relative to legacy media. And so, you know, to see a company be able to do that is amazing. And I think that's entirely ingrained in the culture of a company and entirely the reason why the company has been so successful in disrupting this, you know, multi-hundred of billion dollars industry, right, in a way that would have been really hard to imagine back when Time Warner CEO called Netflix, the Albanian army that was trying to take their little guns then attack this big giant media industry.

Starting point is 00:59:01 So going forward, I mean, you know, there's various ways that Netflix can add more value. And of course, that drives subscriber engagement, new subscriber additions and the ability to increase pricing over time and increase pricing in a way that customers are okay with. This is the key. Pricing power is not that I can shove pricing down your throat and you have no choice. That's one way to do it. And I think that's how most Buffett-esque, I don't think Buffett-esque, I don't think Buffett-esque investors who've learned from him, think of pricing powers.

Starting point is 00:59:26 I can cram down pricing on you because I can't because you need my thing so badly. I think the better way to create a service product is one where the customer gets so much value that they kind of don't mind if you charge them more. You know, because they're like, I love this. I just look at Apple. This is like the epitome of pricing power, right? You can buy a smartphone for $200, but you pay $1,000 for an iPhone. I mean, this is just my globe.

Starting point is 00:59:47 Ferrari is another one like that where you can buy a Honda Civic for $20,000. You'll pay $250,000 for a Ferrari. Again, these companies are creating so much value for their customers. However, you define that value and whatever that customer set is, that customers are willing to hand over money to them. They're begging them to take their money, basically, right, their products. So with Netflix, they just announced recently that they're going to enter a game, they're going to add gaming to their service, which, you know, we've done some work on the gaming industry. And, I mean, it's very mainstream, very ubiquitous. You know, there's a big global market and exactly the market that would be consuming content.

Starting point is 01:00:19 So anyway, these are other ways that Netflix adds value. And so potentially could surpass our forecasts over the next decade. I want to talk about those forecasts a little bit. I have one last sort of two-part question for you again, which is basically, you know, now that we're cash flow positive here on Netflix, how do you see that cash flow growth continuing? And then what's your discount rate to get back to today? And, you know, another way to think about it is just what's the intrinsic value for Netflix

Starting point is 01:00:45 and how does the price kind of compare to that in today's market? Our sort of forecasted model, you know, that goes to kind of the 2020, 20, 2030 timeframe Netflix growing subscribers. So both of the growth in subscribers will come from international markets. We really don't care too much about U.S. subscriber growth because we sort of have had the viewpoint. This is a mature market. It succeeded our expectations actually in that it has actually grown. But where we do think that the U.S. contributes is on pricing. So Netflix has much greater price and power here because we are willing to pay a lot more for video entertainment than like, say, a customer in India or even Europe actually. We do think that the U.S. contributes to pricing

Starting point is 01:01:25 over time, which falls directly to the bottom line pretty much. We see most of the subscriber growth coming from international markets, where the penetration rate is sub 10% still from our viewpoint. And so if they're successful in doing what we think they can do, which is grow revenue to like 90 billion on the back of, call it about 10% subscriber growth over the next decade. This is a compound annual growth. It's basically doubling number of subscribers today to sort of eight to 10 years from now. Pricing grows about 7% a year. Operating margin to grow at 35, 36, 37, percent. We see revenue of about 90 billion and free cash flow of about 20 billion. And so when we discount that back, we do a whack, you know, kind of a weighted average cost of capital discount.

Starting point is 01:02:07 You know, we think Netflix has guided to roughly 15 billion in debt that they'll have their balance sheet. We think they can actually grow beyond that. It's something like two times, I bet da. And, you know, we think of their equity cost of capital as being kind of the standard 9%, which the market has returned over time. In the past, when we first invested in Netflix, We had a higher equity discount rate because it was riskier. It was unknown how well the international markets could develop. The U.S. was very developed. It was very mature.

Starting point is 01:02:32 So that could get a 9% kind of a discount rate. It's kind of a standard average market discount rate. But international was they were investing in that was a much riskier business. And that was just unknown. But there was a lot of upsetting to come from that. But today we sort of see the international business as being known. They demonstrated they can grow it quickly. And this is the other thing that Netflix does really well is they've taken the business

Starting point is 01:02:52 model of content production from being a very local one. So if you think about U.S. media companies, they produced in the U.S. European media companies, they produced in Europe. Netflix is the first that has a global production capability, and they take that global production and they distribute it globally so that, you know, some of the biggest shows in Latin America are big shows in Europe. I assume at some point they'll be big shows in India because culturally, there's a lot of similarities between Latin American India.

Starting point is 01:03:18 Indian shows have been distributed globally. And, you know, one of the big shows here was Sacred Games that came out of India and it was subtitled. There's European shows that have been done really Lupin. There's a French show that has done really well here, but it's all in French, right? So we're seeing this ability to basically source content globally and distribute it effectively globally, which no one else has done yet, right? This is the first thing that was done. And from that comes a lot of advantages, economic advantage of content production, right? Because the US is one of the highest cost content production regions, whereas India or other parts of Asia, parts of Europe, Latin America,

Starting point is 01:03:52 these are lower content cost production places. And yet the value that you can generate from it is global. So we watch in the U.S. We're a high value market, Europe with a high value market. So there's lots of economic plays in there that make precisely pointing to what content costs will be in the future kind of hard and also what the margin will be kind of hard. But we think kind of a mid-30s margin is a reasonable estimate. So when you bring that back down, you know, to what we think the fair value of the company

Starting point is 01:04:18 is, I think you're going to be surprised. It's, you know, given the $500, it's like $520-ish price that we're at today, we actually think this is worth $870.70. So there's quite a bit of upside, yeah. But that's, you know, if you believe those forecasts, right, if you believe those forecasts, and depending on what your cost of capital, you know, what your cost of capital assumptions are, it'll be different. But from our perspective, given our framework, 870 is kind of what we think it's worth. Arif, this has been fantastic. I've really enjoyed talking with you about Netflix. And I learned a lot. It's a product I use all the time. So I had a particular

Starting point is 01:04:50 interest in it. You've been right about the stock for a long time, and it'll be interesting to see where it goes from here. But thank you again for taking the time to come on our show, and we always live having you back, so I hope to do it again soon. Oh, you're very welcome. I love chatting with you and your colleagues. It's always a great conversation. And I'm glad you found it interesting, and I hope your audience does too. All right, folks, that's all we had for you this week. If you're loving the show, feel free to follow us on your favorite podcast app so you get these episodes in your app every week automatically. And don't forget to follow me on Twitter and say hello at Trey Lockerbie. And lastly, if you learned a lot from this discussion

Starting point is 01:05:24 and you want to figure out how to do your own intrinsic value calculations, you can simply Google TIP Finance and look at all the courses and tools we've already built for you there. So with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP376: The Value of Netflix w/ Arif Karim

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