The BuyChart of the day: NFLX Expectations
Netflix reported Q2 2023 earnings last night. Mr. Market didn’t like it – the stock traded down nearly 10% after hours. But business momentum is good. Revenue growth accelerated to 7.5% year over year. That’s an improvement from the anemic low single digits that Netflix has been clocking in this year. Management claims that the crack down on password sharing has worked: subscriber count was up 8% globally while ARM (average revenue per user) was expectedly down as some password-sharers started paying a lower “sharing price”. But we’re not sure this 8-10% number is going to cut it.
The BuyChart of the day is something that Netflix’s Management keeps harping on about: Potential Market Size. According to them, the transition from Linear TV to Streaming is an under-appreciated growth vector:
However, that doesn’t alleviate 2 questions on investors’ minds:
- What about increasing competition?
- Is the stock still too richly priced for this 8-ish% growth?
On the second question, the Buycaster puts things in perspective. It digs into “revenue growth that we need to believe to consider buying the stock”. It’s what we call The Buycast:
What do you think? Can they pull it off? This data doesn’t incorporate the latest financials from Netflix – they haven’t percolated through our systems yet (they will by Monday). We’ll circle back with the new Buycast because we are working on a full, deep dive investment thesis, just like the one we did for Disney.
For Disney, we had to crack open the Buycaster and play around with cost structure assumptions of the company to come up with an “Adjusted Buycast”. Maybe we’ll need to do something like that for Netflix. We mention this because the Buycast above has been back solved with the premise that Netflix’s current cost structure won’t change significantly. Management may have something to say about that. But that’s Level 2 analysis, which we’ll get to in the deep dive. Stay tuned!
The BuyTheme of the day: Renewable Energy
We found these charts in this article from Vox titled: 3 reasons why this summer is so damn hot! One of the mysteries of Climate Change is calibrating the pace of change. It’s a hard thing to model and predict. But we shouldn’t get distracted by the quest for unnecessary precision. Even if climate scientists are approximately, kinda, sorta right…we, as a civilization, are way too lax about the whole thing. We need to keep reminding ourselves of these overall trends – that’s what matters, the overall trends:
All this doomsday talk got us interested in Renewable Energy stocks. So, we started digging around in the Buycaster. A former holding, Canadian Solar, looks mighty interesting. Check out their highly believable Buycast:
Macro Dose: Fool’s Gold
Inflation is a hot topic, and there’s a whole industry devoted to reading the macroeconomic tea leaves. Most of them show up on TV with useless advice. A lot of this advice centers on “inflation hedging”. Commodities are often regarded as an “inflation-hedge”. Gold is a particular favorite. We don’t subscribe to this nonsense. American stocks (represented by the S&P 500) have always outperformed Gold over the long-term – by a significant margin. And we expect this trend to continue in the future. Investing in equities is our favorite inflation hedge over the long term.
Here's some data we gathered: We compared 2 popular, accessible, investable ETFs – GLD (tracks gold prices) and SPY (the most popular S&P 500 tracker). Take a look at their performance numbers (GLD data starts only in November 2004):
Basically, in most time windows and in most circumstances, holding equities has a much higher chance of a positive payoff (read as beating inflation) than Gold. Yes, this data is limited to the last 19 years or so (because of GLD) but we’re confident that the trends in this table hold up over longer data sets. And we’d bet that these trends will hold up over the next couple of decades.
Using Gold as an inflation-hedge may work in the short-term…sometimes…maybe. But that’s basically market-timing. That’s investment-speak for gambling.
If numbers aren’t your thing, listen to the legend Warren Buffett himself – the following text is from his Berkshire Hathaway 2011 Annual Shareholder Letter. We promise you will thoroughly enjoy this excerpt – nobody entertains like Uncle Warren in the world of Finance & Investing.
From the Berkshire Hathaway 2011 Annual Shareholder Letter (from his discussion on types of investments):
“…The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.
This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.
The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.
What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.
Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”
Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.”
--- End of excerpt from BRK Shareholder Letter ----
Don’t fondle the cube. Many Happy Returns.