Q4 2022 hedge fund letters, conferences and more
In their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discuss Why Netflix Is An Amazing Business Story. Here’s an excerpt from the episode:
Bill: On something like Warner Brothers, it’s not the type of thing I want to own anymore. I’m not that interested in that. But I get why people bought it down, certainly below 10. I even get why they buy it here.
Tobias: When you say that type of thing, that sounds like there’s been some evolution in your investing strategy. What are you trying to get to?
Bill: I can’t get comfortable with a business with that much leverage that has its core cash generation coming from something that’s losing video consumers 10%.
Jake: Wait, are we talking about Qurate now or?
Bill: But that’s the thing. With Qurate, the argument was that the cohort would remain stable, and that customer decline would be a lot lower than your cord cutting, because they skew older.
Jake: Right.
Bill: Their disclosures of minutes watched are going up. I don’t know, man, legacy media with that much debt scares me. It’s also why I cut the cord quick. What a pun, but it’s why I didn’t have a whole lot of– I’m not sticking around in Qurate to find out what the end looks like. I had one thing that I wasn’t willing to bend on and it would have forced me to bend. So, I don’t know. I just think it’s a very hard–
An interesting dynamic is I think when Warner Bros comes out and says, “I’m going to license,” and then the shares respond like they have, I actually think it really solidifies Netflix’s competitive position, because now the incentive is like, “Okay, well, license to Netflix. Paramount has got the same issue. They have the service debt.” I don’t think their shareholder bases are particularly patient. It’s just an interesting thing to watch.
Jake: I don’t know how you guys wrap your mind around media. I find it really hard to imagine what the world of that looks like in 10 years.
Bill: Yeah, I don’t know that I’m any good at it.
Jake: I know I’m not. So, I just stay away, but I’m jealous of all these other people, because it seems like when you figure it out, there could be very, very good businesses inside of there when you understand it. But I don’t know, too hard for me.
Bill: [crosstalk] It’s nice to have subscription.
Tobias: Yeah.
Jake: What did you say, Billy?
Bill: It’s nice to have subscription revenue, right? It’s a nice business model but it’s a cost issue right now. So, we’ll see.
Tobias: They’ve allowed people to share passwords forever and they’re cracking down on that a little bit, that shouldn’t be that hard to do. You just have one device using one password at a time. You could turn that on at any time. What’s their thesis there? When we’re in that high growth, it didn’t matter. And now that they want to switch it to profitability a little bit, but they can’t imagine that everybody who’s sharing is going to start buying a new subscription, right?
Jake: Oh, maybe enough to– When your sub numbers stall out, you got to figure out how to keep them going, right?
Tobias: That’s a good point. Yeah.
Bill: Yeah, and you might be able to say, $3 more a month, and you can keep your profile on your parents’ account, and you get a couple more bucks. I think the thing that is so shocking about Netflix to me is I, for the longest time watching that business, didn’t understand at all what they were doing. Watching the debt markets fund that I thought was so stupid. And now, when you see what they built– Maybe this was just like the 10% chance that worked out. But from an allocation of equity perspective, for them to build that business and to have debt finance that risk, that is fucking impressive. That is an amazing business story to me. Obviously, it carries the valuation it does because of that, but that’s not something a younger me ever could have seen.
Jake: Is there a matching to that though of the production of the asset, let’s call it a piece of content, you pick whatever favorite show. And then using debt to finance it, and then the duration of the cash flow to match the liquidation of the debt, is that work? Because I feel like this stuff is like it ages like lettuce out on the kitchen counter. Is there a longer tail to this than I’m giving it credit for?
Bill: Well, I think now the machine is able to continue to spit out content. You’re not counting on previous movies to retire your debt. But they’re super underlevered. They’re only three times levered on a cash flow basis at this stage, from a debt perspective. If you’re an equity guy, you can say, “Oh, well, how much of that share-based comp?” The debt market doesn’t care about share-based comp. It’s true cash to debt. So, that business is very conservatively financed at this point.
Jake: I guess that debt Hail Mary landed in a way.
Bill: Yeah. I don’t know. Was it Hail Mary that landed or was it something I didn’t see for a long time? I’m not sure what the answer is there, but it’s a hell of– [crosstalk]
Tobias: They must have pretty good analytics in the backend that they can see. They can direct their investment to the stuff that pays off. So, you get season after season of like Emily in Paris. The other things get chopped pretty quickly.
Bill: Yeah. I suspect they’re better at having an idea of what an existing syndicated sitcom could do as opposed to creating something new. I’m not sure that they’re that good at creating new stuff.
Tobias: Have any of the Netflix shows gone into syndication on cable?
Bill: No.
Tobias: They do that?
Bill: Not yet. But I wouldn’t be shocked if some go to Roku. Roku is desperate for content on their channel. Warner Bros just had a release that they’re given, I think like 2,000 hours or something to the Roku channel. Roku needs that.
Tobias: JT, do you want to do your veggies?
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Article by The Acquirer’s Multiple.
