We have some breaking news Netflix, just reported their
earnings report, just a few minutes ago, and this is for Q4
of last year. So we get to see what's happened
now. Before we even dive into the
shareholder letter and go through the earnings report, I
just want to go over some of the headline news.
Here we have the big news, this is what every investor pays
attention to the quarter by quarter subscriber gain, or
subscriber loss for Netflix. In this case, they forecasted
gaining 4.5 million subscribers and they ended the quarter with
a net addition of seven point six, six million subscribers so
they beat their forecasts for subscribers.
That's good news. I like it when the business is
growing, but I think investors pay a lot of attention to this
news. In particular, if we look at the
reaction from the stock market, it's always volatile.
Netflix is one of the most high beta volatile companies.
Even though, I think the business fundamentally strong,
this stock is all over the place.
So this is one that I discourage others from investing in because
I don't think most investors can tolerate this level of
volatility. Now, the Like right now is up 5%
after hours. It went as high as eight percent
and then it moderated a little bit.
But this is what everybody pays attention to after Netflix is
earnings. And I actually don't think that
investors should be paying attention to this so much of
this stock. Price movement is driven by a
short term Traders options, different investment vehicles
that push the price up and down. And I don't think it's
reflective of how the companies actually doing.
So rather than focusing on the short-term price fluctuations.
I want to dive into the actual letter and see how this business
is doing. Now, as you know, I'm invested
in this business. So you're looking at this from
someone that has a stake in the company.
This is one of my larger Holdings.
I've, I've kept the faith with Netflix, I kept invested in it.
When it fell 70%, I kept invested in it when Bill Ackman
sold out, I kept invested in it when people were trashing me in
the comments for staying invested in this company,
because every time I look at it, I liked the company.
So I come from that perspective, I like the stock, I like the
company I'm staying invested in it now.
Here we go Q for 2022, Revenue, operating profit.
Membership growth, exceeded our forecast, we continue to lead
the industry and streaming engagement revenue and profit
that they can say confidently because they lead it.
In all of these categories by a wide margin, every other
streaming competitor, whether it's Disney Paramount, peacock,
Warner Brothers, Discovery, all of them lose a lot of money with
their direct-to-consumer part of their business.
This streaming part of the business Netflix is in a very
privileged position whether the only one that reach scale.
They're actually profitable. They say rq-4, contents, late,
outperform, even are high expectations.
Wednesday was our third most popular series ever the hariya
Meghan. Our second most popular
documentary series troll was our most popular non English film
and Glass Onion and I felt mystery our fourth most popular
film. So we have over just the past
year for of their most popular pieces of content in the history
of the company. All came out last year and
Wednesday. This was like a smash success.
It's crazy how Netflix even without all the IP.
You have companies like Disney that has all this incredible IP
like Marvel, and Pixar, and lucasfilm Netflix doesn't have
any of that. But somehow, they just, they
just fabricate. These Smash Hits like Wednesday,
troll, Harry and Meghan, right? They documentaries they come out
with the different series. Sometimes they just start able
to pull a success out of nowhere.
They say we successfully launched our new lower price
adter ad-supported. Plan in November and are pleased
with the early results with much more still to do that strikes,
me is some potential weakness there.
They don't give much in it. I think if they had incredibly
good statistics or measurements on it, they probably show it
here. So I think there's probably a
reason why there that doesn't strike me in building confidence
saying that we're satisfied with it, but we still have more to do
in my opinion. I read that as the ad tears.
Not going strong, but who knows. We'll look at that later.
They say we did. I've heard on the high end of
our operating profit margin Target for the full year of 2022
and we expect to increase our operating margin in 2023 verse
20, 22. So they're operating margins are
actually increasing over time. They're not going down.
And this is the sign of a company that has operating
leverage every additional dollar of Revenue that Netflix makes
should actually increase their profit margin of the company.
They're operating margins. So that's a company that has
operating leverage if a company earns more and more Revenue but
the margin stay the same. That's a Any that does not have
operating leverage. And Netflix is a company that I
personally think has an incredible amount of operating
leverage. They say for 2022, we finish
with 231 million, paid memberships, and generated 32
billion of Revenue 5.6 billion, and operating income to billion
of net cash from operating activities and 1.6 billion
dollars of free cash flow. So this is a profitable company
profitable in the full year of 2022 and even profitable, when
you look at a free cash flow metric, 1.6 billion dollar And
free cash flow. If we Zoom down to the cash flow
statement, we can actually take out the stock base Compass
stock-based comprar the entire year of 2020 to amounted to 575
million dollars. So we look at this again and
just do some quick a napkin math.
They did 1.6 billion dollars in free cash flow.
We can net out. The stock based compost is
roughly half a billion dollars and the company may just over a
billion dollars in free cash flow in 2022.
That's the story of Netflix, a free cash flow, positive
company, even factoring in paying their employees.
Employees and my opinion is in 2023, will see their forecasts,
but I think they're, I think their free cash flow is going to
go up dramatically. We have some unfortunate news
here. This is news that I don't like
to see Ted strandos and Greg Peterson are.
Now the co-ceos of Netflix with Reed Hastings as executive
chairman. So he's stepping down.
Reed Hastings is one of my favorite CEOs.
I like the guy I display. I like his mind, the way that he
thinks how simple he puts things.
Obviously, he was an incredible. Of Netflix.
So we're seeing in my opinion, the same thing where we saw Jeff
Bezos go away to the executive chairman position, we're seeing
Reed Hastings, do the same thing.
But when I look at this it's only a matter of time until this
happens. He's been running the company
successfully for a long period of time and I think that this
shows that Netflix really thought about a succession plan,
they had Ted surroundings, be co co for a number of years, and
they're kind of handing, the Baton off to another co co.
So this, Had I think a much better succession plan when you
compare it to something like Disney where they just threw
someone in the position that didn't know what they're doing.
So, even though I'm sad to see Reed Hastings, step down, I do
think their succession planning, was much better than some other
companies so far overall I like the report there's some parts of
it that I don't love the commentary on the ad Terror.
I think was very weak. I think it was a red flag to not
share the actual numbers and say we have a little bit more work
to do on that but I'm not too concerned about that.
I think that will be something that's iterative and slow.
Growing. So the actor is not my primary
focus overall, Netflix is a company that just added seven
million paid subscribers. It's a lot of new members to the
actual company and the fact that they're growing free cash flows
while adding more subscribers I think is impressive.
The company did 1.6 billion dollars in free cash flow even
netting out. Stock-based compensation, 1.1
billion and I think that will over double in 2023.
Then they have commentary on their competition.
This has been one of the big critics of net.
Flicks, one of the big bear cases for the company.
Competition is coming to get them.
They say we continue to operate in highly competitive markets,
as consumers, have a vast number of entertainment choices, beyond
our direct streaming competitors.
We also Vie for consumers, time against linear tv, YouTube
short-form entertainment, like Tick-Tock and gaming to name
just a few. The Silver Lining is that the
market for entertainment is huge and Netflix is still very small.
By comparison, I watch this old interview with Jeff Bezos.
Back in 2010 and it was with Charlie Rose and Charlie kept
asking him, how is Amazon going to beat Walmart?
And how is Walmart going to beat Amazon?
And they're going back and forth.
Like there's going to be a winner and a loser and Jeff
Bezos had to remind Charlie. That retail is a massive
business and there's good odds that Walmart will succeed while
Amazon succeeds. So he doesn't have to worry too
much about Walmart. This is exactly the point that
Netflix is making here. Entertainment is massive,
YouTube Tick-Tock Warner Media Disney and Netflix can all
succeed. And then they finally go on
talking, once again, about the cash flow and capital structure
noting that their free cash flow generative.
Their company that has good operating margins.
They're increasing their margins over time with every dollar of
additional revenue. And they are a scalable company,
something that I really like my investments.
So, that's the earnings report if we want to look at the
numbers visualize, we can use qual term here.
We have the most recent numbers already added in Netflix, right
there. Their revenue was seven point
eight, five billion. So it's a little bit lower than
the two prior quarters, but still, an increase
year-over-year. And again a lot of this has to
do with the FX currency. So they're expecting re
acceleration of the revenue. Now, we look at the important
number here, the actual cash flows of the company we have the
latest quarter right here, three hundred and thirty, two point,
two seven million. If we factor in stock base,
komp2, it is exceeding the amount that they're paying even
in stock-based compensation, this is becoming a truly free,
cash flow positive company. When we look at it on a full
year, Sis of 2022. This is what the final numbers
look. Like the 1.6 billion again.
The simple math. There we add in the half a
billion dollars from stock-based compensation.
They're still making over 1.1 billion and free cash flow, even
excess of their pay. So I like it, I like the
direction of the company and my opinion, the story hasn't
changed the original reason that I invested in Netflix is because
I've looked at history, I've seen these media companies like
Disney and BC Paramount stay around for 100 years and
generate excessive amounts of profit.
I look at Netflix as a newer version of that type of media
company. I think it will be around for
100 years. I think it's going to grow its
free cash flow. I think it's going to scale
across planet Earth. Especially when more people get
internet service, we can focus on the quarter by quarter six
percent 10 percent down. That's not where I'm focusing.
I'm focusing on the overall story arc are so that's my
thoughts. So far.
Hope you enjoyed this update. See you in the next one.