Why Netflix Stock Is Cheaper Than You Might Think

[@HamishHodder]

And for the 0.001% of people who are Pink Floyd fanatics: yes that is an original UK first press Dark Side of the Moon LP

[@Caiogasp]

Hahaha. I was thinking about it! Nice one!

[@AusxStylez]

Wow thats awesome

[@markl9451]

You could sell an NFT of that for a decent profit 🤣

[@samscil]

@@markl9451 and still keep the vinyl haha

[@vincentjackson3472]

You bloody legend Hamish, liked you plenty before, but just got a different level of respect haha 🙏

[@drstrange404]

Hey Hamish! Wonderful breakdown of the cashflows...I was kinda lost in between but being a commerce student, could grasp most of it after little deliberation. Got to learn a different perspective of looking at the business. But as you said, there are other factors that need to be looked at too! Things like Management's abilities, Firms ability to generate consistent cashflows on am operating level and most Importantly the MOAT which can safeguard them from their competition which is now gaining traction with many big wigs fighting for the eyeballs. I would like you to cover these aspects too! Maybe a part 2 video is required here. 😄😄

[@simonchan0404]

Hi Hamish, thank you for your analysis on the financila statement, from what you mentioned, it may be correct that the 18 billion expenses is worth spending. However, the major two set backs of Netflix are first the competition from Disney+ as Disney got his own films or content that provide Disney competitive advantage. Second, during past year, the Netflix is benefited from the staying-home due to pandemic situtaiton, but now, Omicron or coming virus seems not so severe and pandemic will soon be end game. People are going out and spend less time at home, same as many other pandemic favourtie stock, prices are all coming down.

[@michaelx3092]

Awesome, the most informative video on Netflix I've seen so far!

[@HamishHodder]

Wow thank you Michael!

[@michaelx3092]

@@HamishHodder I really do mean it! Everybody can do a superficial video about Netflix' stock and company but I really appreciate you shedding light on two key issues without "boring" everybody with the same information everybody else tells you

[@kostakos1331]

Absolutely excellent content

How much of that content spend is maintenance and how much is maintenance is almost impossible to say in my opinion. I wonder if even management knows - although they probably have a rough guess. Great video Hamish. Just like you, I haven't really considered NFLX so far because of that cash burn, but there seems to be a lot under the hood here that you don't see at first glance.

[@sankaranarayanank.p2249]

Brilliant analysis, in deed! Thank you.

[@EdisonOuyang]

Disney/amazon/Apple can live without streaming or even losing money on streaming, since the streaming can become a ad or promotion service for other departments, they don’t have to win this game quickly, but Netflix can’t afford keep losing money especially after we are about to wrap up easy money cycle. Netflix is too hard to see the future.

[@seanlynch8869]

Great insights Hamish 👍

[@stefanoelias4414]

Totally agree with you. Nice enlightening angle that I hadn't seen before. Earnings per share on this growth stock is in my conservative calculation a price per share of about $350. That fits your perspective with an expected return of 10% per year over the next 10 years. In addition, in 2021 the ROIC was 16% (7% average the last 10 years). So a nice upward trend. I got excited. And this company already has a strong moat through the brand name. I have something to think about this weekend! Thank you!!

[@anderskrusell5238]

Interesting angle, will definitely be following the stock - thanks for the video Hamish :)

[@jeremynewell9903]

Refreshing video. Thanks Hamish

[@ebianboy]

Great video Hamish, it is great as follower of your video, email and young investor podcast, it is hard to believe you will think Netflix is cheap but I love the perspective you had at viewing this company.

[@andyuntono8298]

If you look at recent subscribers growth of Netflix, it slows significantly. This shows that a large portion of the heavy capex that Netflix spent is only achieving competitive parity rather than subscribers growth. It will be interesting to see how much other streaming companies are spending in terms of content vs Netflix & their subscribers growth vs Netflix. I am also not sure about the accounting policies in United States, but in most countries, tax authorities are smart enough to have their own depreciation policies rather than following a company’s own arbitrary depreciation policy.

[@rodrigodossantos2856]

Thanks Hamish for your insights !

[@qwaheemmarshall5600]

My question for Netflix is, when will the content expense not way on the FCF...I feel they will always need more and more capital for content. Even if somone finesse the cash flow statement accounting, it just seems capital spent on content is never ending. Kinda makes it hard to value.

[@InvestingwithTom]

Great video and research man! This one’s a really interesting case study

[@HamishHodder]

Thanks Tom! I enjoyed the discussion you had on Punch Card Investing!

[@InvestingwithTom]

@@HamishHodder need to get you on there one of these days

[@jaredcolby9587]

After following your earlier discussions around mgmts share repurchasing plans I was really doubting their judgement. Seems like maybe I was too quick to form my opinion... super insightful stuff!

[@Johnjannettewasere]

A case for determining capex being used for growth or Maintenance could be made either way as you have said. I suppose we could say 50/50. Either way its a big call considering the $ amount. I think this one goes into the to hard basket for me.

[@Caiogasp]

Good video mate. Competition is increasing too fast and it feels to me that Netflix is being forced to continue to invest that amount just to keep people interested. How many times we hear people saying that they don’t have anything left to watch on Netflix? Great business, but hard one to be confident about. Bill Ackman will definitely help a few people to buy and drive stock price up. But, I’m out. However, after Tesla reaching these crazy numbers with minimum FCF, I feel the return on Netflix will be there for sure. 🎰 cheers.

[@HamishHodder]

Thanks! Certainly competition is increasing but assuming you trust the founder (which you might not haha) then engagement AND retention on the platform has increased, not decreased after competitors entered the market

[@ArnyTrezzi]

Oh this is a great video on Netflix. Didn’t think of the tax implications, thank you.

[@David95111]

As a European I know that countries are placing rules on streaming services, to protect their own film industry. For example, in France streaming services need to reinvest 20-25% of revenues in French content. So although Netflix at first could expand mainly with (centralized) English language content, they’re now forced to spend more on ‘maintenance’ content in all sort of languages to be allowed to operate in certain countries. This probably means that the mandatory spending on maintaining the customer base is higher than it would have been a couple years ago and might be increasing. And that content will have less overall value as well, as for example Americans are probably less likely to watch French films and series. Just something to keep in mind

[@Lord_Saruman]

that's probably just France though :-)

[@David95111]

@@Lord_Saruman I think that at least both Spain and the Netherlands have or are working on a similar law. Also there’s an EU directive that at least 30% of all content must be produced in the EU, although the latter doesn’t necessarily mean that it has to be in a language other than English of course. But yeah the French are probably more extreme in this regard than the other countries, they absolutely love their language (and country)

[@Hvspecter1]

Hey Hamish. Appreciate your priceless contents! Can you cover Sofi?

[@mentoralexandermantillainc6885]

Excellent video, I really liked it, however, investing in Netflix makes me consider as risks: 1. Increasingly strong competition, which has their respective characters or series to exploit; 2. 2. A subscriber base that is attracted to the competitor's training and these in turn do not accept the transfer of inflation to subscription prices 3. A market that is highly dependent on new series or continuing movie or series sagas. In summary: the business model sounds attractive to some extent, but to what extent does the share price compensate for maintaining a model of constant reinvestment while reducing freecashflow

[@Josh-zq7pq]

Great video man, an Amazon situation here that will take a decade to play out or more. Either their ROIC was insane or poor or somewhere in the middle. I think a midpoint FCF yield of 3-5% is reasonable given the likelihood they know what they’re doing is high.

[@JohnRicci]

Great video Hamish!! You had a very interesting idea on looking at Netflix. I am not a buyer of Netflix but you made a very good point (in my own translation) that as long as Netflix keeps on producing content then the MOAT will be larger. It is similar to you as a content creator that you will have a larger MOAT if you can produce 1000 videos compared to other youtuber who only has 100 videos. Keep up the good work mate!

[@KapilLadha]

Great Video! Amortization of content assets makes up the majority of cost of revenues.

[@matts1537]

I wonder how often people go back and watch the couple years old Netflix productions. Might be bias from my own watching habits but I only watched the stranger things seasons once. Whereas, I've watched marvel and Disney movies repeatedly

[@cheeseandmarmite7557]

Why do you believe, Hamish Hodder, that Netflix spent about $18b on new content assets? The figure that you highlight in the cash flow statement ($17.702b) isn't a cash expense. In fact it is a benefit, not a cost to the company. it is shown as negative because of the backwards way that Operating Cash Flow (OCF) is calculated. in calculating Net income, this $17.702b is ADDED to the OCF ("Net cash provided by operating activities"). Similarly, you will see that "Amortization of content assets" is shown as positive in the CF statement, but is actually a non-cash cost which decreases net income. The figure we need does not appear on this statement - it is well hidden inside the OCF figure (+$0.392m). Netflix tells us this, but doesn't seem to tell us how much was spent on new content. With the indirect method of calculating OCF, most of the items in the CF Statement are non-cash and so my guess is that the $17.702b "additions to content assets" is the company's estimate of the increase in the valuation of the content assets, which could be a lot different to the cost of production. This figure is nowhere near the change in value shown in the balance sheet (+$5b~). I agree with your point, but everything would be clearer if investment in new content was properly shown as "investing cash flow", not mixed up with OCF. Thanks for the video.

[@richardhughes759]

Great vid brother

[@nistalasuresh5837]

Great video... Thanks

[@BubushiByNature]

I've enjoyed this video very much Hamish. I am still not that convinced that they can keep their moat for long, as their moat was the innovative platform and hype, but they've erroded over time, leaving them to compete over content, where Disney and others are better (while they are the "shameless cloners" of the platform...)

[@HamishHodder]

Thanks for watching and sharing your perspective! They've certainly lost their huge market share (at least in the US) since the introduction of competition from the legacy media companies.

[@alibhuiyan8013]

Yeah, I agree. It's getting cheaper now. Bought 2 shares @ $265/share(starter position)....will increase slowly going forward

[@Andres-sr7uv]

Sorry. It’s lower atm

[@cashflowyield]

@@Andres-sr7uv Yeah, my cost basis is around $220. Holding for the long term...

[@Andres-sr7uv]

@@cashflowyield probably better to buy right now as well

[@Tom_Skelton]

It is an interesting idea. I would probably value them using that $5 billion figure as the reinvestment beyond maintenance capex. But they still seem very overvalued using that figure and your model even assuming 20% growth. I've read that the basic question for Netflix in the future is "how good of a Hollywood production studio can they be?" If they can keep producing and buying new great content, they can keep their subscribers and continue to grow the business. If they are middling as a production studio, they will start to loose market share. I think they are beyond middling right now but not quite great as a production studio. I like Netflix but have thought about ditching it in the past. They need to keep making good content to keep me as a subscriber.

[@sempeltje]

Isn't it the case that companies can do two seperate filings? One for tax purposes and the other one for investors. In the one for tax purposes management is allowed to decrease their taxable income as much as (legitly) possible and the other one for investors. Besides that great video!

[@irisgolles6142]

Hey, hi! I really would like to know how to research stocks and also how to find stocks. For example if i want to have a look at Facebook stocks in doesn't come up in my app. How do i find the stock Facebook belongs to and even for smaller companies.. for the Aussies how do i find out how to buy emu export shares haha and how and where do i research further? Would appreciate any help!

[@aravindrajendran5053]

I am from India. Amazon prime charge 20$ per year and Disney charges 20$ per year .they produce better content than Netflix. Netflix charge 10$ per month.i don't know how they survive in India.

[@devanand9943]

There are new titles in netflix every week unlike amazon prime. It is better than prime.

[@patrickchapman5335]

Apologies if I’m missing something but surely if management say it is amortised over four years then (assuming evenly) then the figure for “amortisation for content assets” would relate to content capitalised over the last 4 years, not just the amount for 2021. Admittedly the amortisation expense has increased in like with the ‘increase to content costs’ but I’d say rather than $12B of this year’s cap ex being expensed as ‘maintenance’ it would therefore be closer to say, $9 or $10B leaving FCF north of $7 or $8B

[@peterr1313]

I found this interesting, thanks.

[@HamishHodder]

Thanks for watching Peter!

[@billsmith7233]

Hi Hamish - Great video and analysis as always. On your point near the end of the vid on assessing the return on invested capital - how would you go about doing that for Netflix given the standard formula of NOPAT / Invested Capital would probably not work for the reasons you mentioned. Would calculating Netflix's ROIC involve going further into estimating how much of capex is growth and then using an operating metric (perhaps some sort of gross or operating income) and then perhaps over a smoothed period of several years to determine? Would really appreciate any insight you might have here as this is something I've spent some time thinking about as an investor If anyone else in the comments has any ideas / suggestions please feel free to contribute

[@arnavgandhi5681]

A nice counter narrative.

[@Ankushkhanna1988]

Hi, what does your intrinsic value calculation say?

[@matijakrajnc7576]

Could you explain the difference between their "cost of revenues" and "adjustments to reconcile net income" in their cash flow statement. It is hard for me to differentiate between the two of them for Netflix. Thanks and thank you for great content!

[@matijakrajnc7576]

The best explanation i found was in their annual report under "Management's discussion and analysis", under chapter "Content" But it is still hard for me to understand.

[@mikestanmore2614]

So Netflix is like a surgeon I once knew who bought a Porsche 930 for tax reasons, when he could have driven to work in a dak-dak. Interesting. One question: what's happening to Netflix's market share? Is it increasing, or is the competition taking it?

[@GennesisDreaMz]

Hi Hamish. Question for you. If 90% of people who look at Netflix stock don''t go into this level of detail, and also if Netflix as a company continue to "mask" these numbers for the next 10 years, while you might be 100% correct in what you're saying, surely the market won't recognise these factors... ever. Unless this information becomes HUGELY public, or netflix stops reinvesting hugely into new content, the cash flow will never be freely available to investors. What you're highlighting here is a company that, for the foreseeable future, has very high capex spending that will need to continue to go on for a very long time. They cant just stop making new series/films, and so its the spending is an integral part of the business that, whilst is a nice thought, won't ever be attributable to investors, and any speculation regarding the conservativeness of management's reporting, is just that speculation, and again will likely continue for a very long time to minimise tax and so never will be to investors benefit in the form of a share price increase directly due to these cash flows. Thoughts?

[@anmayo917]

You may wanna check the after hour share price 😬😬😬 A good entry point/opportunity to average down in your opinion?

[@MrVaSiLiN4iK]

Very interesting way to look at Netflix from different perspective. I will agree with you that they most probably amortize their intangible assets in a faster way than its actually worth. Less net income - less taxes. Also regarding debt I am agree that if they will spend less on movie production and amortize their intangible assets not so quick then we will have much better ratio regarding debt. But the real question is do they really need spend so much money on movie production to stay afloat. That we dont know, we can only assume and make a bet. Not value investing. Also if you look at the business in general, its a very capital demanding business to get more subscribers for 11 - 15 dollar a month. I guess they should better find a way to monetize more their subscribers. I like more business model of youtube. KZbin is a free platform where users creating content and youtube is making money from advertisements. So Google doesn't need to spend billions on content to get more subs. I am not sure, but i think spotify is going this way with their podcasts. Users creating content, revenues from ads + premium subscription.

[@darrenprior6339]

Assuming Netflix could stop producing content to bring the cash back to the business or shareholders is like saying a bird doesn't have to flap its wings to remain in the air. Nope.

[@TheQuickyouknow]

Well birds mostly glid off the wind, flapping is often not necessary unless they're taking off of going against the wind.

[@hellopiyush]

film or content making was never very consistent business. Alot of netflix films are too expensive for the crap they produce. They should maybe learn from cable companies model where they should be distributeur of content rather than creator. Hbo and disney hit rates are much better.

[@srikrishnaprabhu4887]

Omg 😲... So Monday a big gap up ...

[@HamishHodder]

Only time will tell!

[@kidze73]

then they have to make hard decision to throw in so much capital to sustain and compete? does not seem like a buffett munger investment to me. I'll pass. I do think one problem with content-generating business is it is hard to get a duopoly position like visa and mastercard, so the only way is to throw capital to compete vigorously.

[@HamishHodder]

Thanks for sharing your perspective! Certainly is a business that requires BIG ongoing investment in content production, the question is how much.

[@kbssbk6656]

Bill ackman is following Buffett strategy

[@ricasperger]

Is there any chance to know how many people have watched Breaking Bad in Netflix in 2021? That could give us some good clue about real asset amortization timing...

[@krispiros7941]

Hi Hamish, did you find a correlation in increasing spending on content, vs subscriber growth and churn rate? That could paint a lot better picture of managements ability. Netflix does not have a moat, Disney and Amazon do. Disney has ESPN and other content they can bundle if needed plus Marvel and StarWars. Amazon has the prime army. One could argue, the only real moat exists with Amazon's diversification, where streaming is a byproduct, but growing with a more solid background. What is your opinion?

[@HamishHodder]

Thanks for watching! Churn rate and engagement (hours watched) is up over time despite continued price increases and growing competition, which to me seems to indicate that they have a pretty sticky product. With that said, clearly spending on content per subscriber addition has increased in the past couple years. So the question is whether their big investment internationally will result in more sub additions as that content accures

[@PLANTONE]

FACEBOOK FACEBOOK FACEBOOK Get on update now!

[@accrualworld4488]

You’re a smart guy and there are good ideas here, but as an accounting professor I can say that your definition of free cash flow is incorrect. If the content purchases were moved out of operating activities into investing activities the free cash flow would be the same. Investors discount OCF-CAPEX=FCF to value businesses. They do not generate positive free cash flow. I agree that some of the content purchases are investments rather than operating costs and categorizing them that way would make them operating cash flow positive, but either way they would be free cash flow negative.

[@HamishHodder]

Thanks for the comment! I often use 'Free Cash' or 'Free Cash Flow' for simplicity when discussing cash that can be pulled out of the business by owners. What I am really referring to is Owners Earnings (Buffett's FCF adjustment that essentially excluded non-essential expenditure on long-term assets) I talk alot about Owners Earnings on my channel so sometimes I forget to make myself clear. Thanks for the feedback!

[@cheeseandmarmite7557]

Also, Professor, I think you are wrong to think that there is only one definition of Free Cash Flow. The definition that you accept, and seems to be quite common (FCF = OCF - CAPEX), is a failure because growth capex is a benefit to shareholders because it adds to the value of the company. it is better to use only maintenance cash flow (FCF = OCF - Maintenance CAPEX), as Hamish does. My guess is that it is just laziness that stops people using maintenance capex - because there is extra work to find it. And do you believe that FCF has any value, since maintenance capex and growth capex reflect decisions of the company not the financial health of the company? I suspect Warren Buffett disagrees with me.

[@KelechIwuaba]

Can't keep using old models to try and understand new businesses. This was a good breakdown of Netflix. There's also setting to said for the ability to hold the attention of millions of people which you can direct in whatever way you please. Driving them to certain funnels. It's extremely underrated the attention Netflix commands. Plus the data Netflix has to be able to know what people like and not like makes them that much stronger.

[@thegreat9481]

Business has not changed, that’s yall problem and exactly why yall end up shirtless when reality hits lol

[@Miggy2j]

Bump

[@MickeyMekhael]

what u think about costo and nvdia ? thanks

[@HamishHodder]

Love Costco's business model, havnt looked at NVIDIA!

[@matthewvanderveer8812]

Have you looked at discovery Warner media merger?

[@HamishHodder]

Not yet!

[@matthewvanderveer8812]

@@HamishHodder if you understand and see why Netflix as a streaming service demands the valuation it has Id definitely suggest looking into it. Discovery and Warner media combined is projected to have about 15 billion dollars in streaming revenue so if you apply the same 5.5x sales multiple nflx has after falling you get 80 billion dollars while if you buy disck at the current price the implied market cap of Warner media discovery is less than 50 billion. And this doesn’t even take into account the other 40ish billion revenue they will have.

[@arangotan]

Interesting and probably accurate way to look at it. I may look into the 10k to see if they have any breakdown. For example the amortizable portion may be the growth portion of it. Prior to COVID though the ROIC was good but not stellar, so are they really getting the growth that such expenses warrant and how long will it last? I like to be conservative and with the competition I’m happy to consider all content spend as maintenance capex, and will ultimately relegate this to the too hard pile.

[@Lord_Saruman]

HBO is not available in many markets, like the UK, once they are, their numbers should go up considerably. Having said that, with these providers is not either or, many people are happy to be subscribed to more than one. My main issue with Netflix is most of the new content is woke as heck. The only reason they get away with it is the other providers are as woke or worse. Regarding how much a good movie or series is worth long term. If I want to watch all the old 007 movies I'd have to pay an arm and a leg to Amazon or other provider to rent them online ... so they are worth some :-)

[@TheAllfreed]

can you make a video about douyu? ... 1 bln in cash, 600 mln marketcap

[@HamishHodder]

Maybe ;)

[@tixchicken]

tencent taking them private

[@MarketOracleTV]

guy posting videos out of room with card board walls giving stock investing advice LOL!

[@SauerGustavo]

Problem of netflix is that they spend so much money on woke shit that nobody likes....

[@xdman20005]

So your argument about AMZN just got thrown out the window. They are the same, massive opex but you could argue some will be for growth.

[@Andres-sr7uv]

It’s cheaper right now

[@ivanoreskovic5582]

It is overvalued…..great business, but overvalued

[@petertaylor.2426]

hi hamish i been getting emails with your name ,I don't open them are a scams can you let me know.

[@HamishHodder]

The only emails that are actually from me will be from: [e-mail] If you are ever unsure but are interested in joining my community, you can reply to the email with your concern and I will always direct you to purchase directly from my website (www.hamishhodder.com). I will NEVER ask for payment over WhatsApp or anywhere other than directly through my website.

[@TheRetailFundManagerPH]

Over Valued! The company is trapped to always use its cash to produce fresh contents every month. Otherwise, they will lose subscribers. If they can't produces fresh contents every month, why bother subscribing.