In my previous note Pick The Mature Business – Facebook? I observed that Netflix ($NFLX) would revert to mean before Facebook. It is an observation on $NFLX’s share price not on the operating business.
At current prices, the owners of $NFLX must believe there are more affluent households out there to take up its service.
$NFLX appears to have hit saturation in the US with 51.9 million subscribers. There are an estimated 126 million US households. Approximately 50% of these households earn more than US$50,000 pa.
$NFLX has 52 million rest of the world subscribers. Is it possible $NFLX has already saturated the international audience for its content? How universal is $NFLX’s English-based content?
The above is not a criticism. It is a stunning achievement. The entertainment sector has powerful incumbents, irrational participants and the Oscar winning Amazon. $NFLX first offered a streaming service in 2007 and now it is the powerful incumbent. Management take a bow. If the owners of Spotify are recruiting they know where look.
$NFLX is currently valued by the market at US$77 billion. Estimated annualised revenue is US$12 billion. The maths only works if you believe there is something else.
$NFLX and others have won the entertainment battle with the broadcasters. Is $NFLX going to attack news or sports?
Does $NFLX have a sustainable competitive advantage on content production because it can monitor user habits?
Is $NFLX building a brand?
What is a Brand?
To paraphrase L2’s Scott Galloway, brands were a knowledge arbitrage.
It is easier to describe what is not a brand. In an economic sense Nike is not a brand. Nike spends around 29% of revenue on endorsements. This is a recurring expense. If Nike, Adidas and others are brands then Under Armour should not exist.
Only one thing is certain. To build an intangible asset you need a mountain of tangible cash.
In any event it doesn’t matter what I think. What matters is: what do millennials think.
So the tech sector is actually the branded goods and services sector.
Interestingly, I believe that $NFLX could build a sneaker based on its user behaviour mapping and not have to rely on endorsements.
What if Netflix is building a brand? How do we know it doesn’t have pricing power?
The signs are there. David Letterman and the Coen brothers have signed on.
My beer coaster investment analysis can arrive at $NFLX valuation of US$60 billion.
I apply a 25X multiple to $NFLX’s current annualised revenue of US$12 billion @ a generous NPAT margin of 20%.
Is $NFLX’s brand worth US$17 billion? If so we can get to the current share price with no margin of safety.