Netflix: It's Getting Complicated
22 April 2021
Three of our companies published their results at the beginning of the week: Danone, Petrofac and Orange.
At Danone (4% of the fund): results in line with our expectations. We will have to wait for the arrival of the new CEO to see what his strategic vision will be - keeping in mind the risk of a serious dry cleaning upon his arrival, as new CEOs often do to mark the occasion.
At Petrofac (6% of the fund): idem, results in line with expectations. No news from the Serious Fraud Office, although CEO Samy Iskander has announced that this subject is " the elephant in the room. […] I will deal with that. " We were hoping for a breakthrough in Q1, but that doesn't change our view: there will be a post-SFO Petrofac and it will have a higher share price than the current one.
At Orange (8% of the fund): no surprise either. The management confirms the dividend of 0.70, which makes our line, at our entry price of 9.40, an investment offering a yield of 7.50%.
Finally, in the "heavyweight" category, Netflix released last night. We should not dwell too much on the results part, where the management has a lot of latitude (the first charge of Netflix is the depreciation of its catalog of series, a figure that can be adjusted in all directions). More telling, the evolution of the number of subscribers as shown in their graph published last night:
It's looking pretty flat for 2021.
So of course the management announced yesterday that the second half of the year was going to be much better, thanks to new productions with a lot of Hollywood stars and a $5 billion share buyback program (without increasing the debt). And this is where we run into a calculation problem:
- Taking last quarter's subscriber count, Netflix is on an (impressive) revenue base of $30Bn per year.
- The company says it will spend $17 billion on content this year (it's expensive to produce). We are at $13 Bn.
- I deduct the $10 billion in operational costs. So I'm at $3 billion.
- I take out the $800M in interest, I pay my taxes (16% last quarter) and I'm left with $1.8B net. This means that I'm a little more than $3 billion short of being able to complete this buyout without increasing the debt... By the way, on a company valued at $230 billion, $5 billion is a trifle. But even that pittance looks difficult to achieve.
It would have made a good question for the call that follows the results. But, in this area too, Netflix is innovating: for a few quarters now, the presentation of results has been done with a single analyst, chosen by the management, with questions asked only by email and in advance. I read the transcript of this call earlier: cheesy questions & smoky answers, to which the analyst concludes each time with a "Great!" or " Brilliant!". In short, nothing that gives a clear idea of what's going on in Netflix's accounts. Not to mention that this is about active management, which must represent 30% of Netflix investors. The others - the passive management - don't even open the accounts, so it's even easier.
These methods allow Netflix to save time. Not change the situation. We'll see how the coming quarters play out in an increasingly competitive universe.
The stock is losing -7% today. Netflix is therefore worth $226bn. The antithesis of a trifle.
Have a good week,
Charles
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