Money with a dash of Funny: Netflix

Showing posts with label Netflix. Show all posts

Thursday, 19 October 2017

Creaming it by Streaming it

To market to market to buy a fat pig. We have had many students come through our office, the number one thing we tell them is that we can't accurately forecast the future. The only thing you know for certain when you make a forecast is that it will be wrong. Broadly speaking, stock markets go up because more wealth is created globally, through a function of us becoming more efficient with our resources and through population growth. We can be fairly sure that global population will reach around 10 - 12 billion people (big margin of error in that estimate) and that humans will continue to innovate.

Based on two assumptions above, if you are in the market long enough you will make money. Buffett points out, one of the only things that could derail the global wealth creation machine would be something like a nuclear war. If the Northern Hemisphere starts dropping atomic bombs on each other, the value of your Apple shares is probably not very high on your list of problems? The key to successful stock market investing is not to chop and change. Add regularly and then be patient; let compounding do its thing.

Market Scorecard. Another day and the records keep tumbling. Yesterday our market opened the day in the red but gradually drifted higher. Around lunch time we broke into the green and then pushed on higher. It was great to watch, every time I refreshed my heat map it would change colour; from a light red to a light green and then finished off with a dark green. The Dow closed up 0.7%, the S&P 500 was up 0.07%, the Nasdaq was up 0.01% and the All-share was up 0.47%.

Company corner

Byron's Beats

On Monday we received great results from Netflix. What a story it has been so far, you could even make a series about it. . . Streaming revenues increased 33% year on year, operating income doubled, and they added a record 5.3 million members in the quarter, much higher than their own expectations of 4.4million adds.

Year to date they have added a whopping 15.5 Million subscribers, 29% higher than last year. Most of this growth is coming from the international business. Many countries have just gained access to the wonders of Netflix and users are coming in fast. Estimates predict 115 million global users by the end of this year. The image below highlights the magnificent growth in subscribers over the years.

A streaming business like this may sound like a profit machine with low capital expenses, but that is not the case unfortunately. It is a very competitive industry and the only moat these businesses possess is their content. Netflix plan on spending a massive $7bn on content creation over the next year. Compare that to revenues for the full year of just below $12bn and you realise how much capital needs to be deployed here.

However, I fully agree with this strategy of quality content before profits. If you do not have your clients locked in, they will easily move on to the next provider. The other providers are also getting more stingy with their content. Hence original content is vital. It also gives you pricing power, Netflix increased their prices just before the release of the hit series, Stranger Things Season 2. If you're hooked, an extra $2 a month is worth every penny.

The share price has had a phenomenal run, up 58% so far this year. The forward PE sits at 86 times earnings; expectations are certainly high. I love the business model and I love the company as a consumer. I think the valuations may be a bit stretched at these levels. Mainly because I believe the desire for quality original content will never end and the competition will increase (Apple and Amazon getting on board). Netflix will have to spend big bucks on content as long as they are in this industry.

On the other hand, 115 million subscribers are just a blip in the ocean, of series hungry consumers. I expect subscriber additions to continue to explode over the coming years. There is certainly a place for Netflix in more risk tolerant portfolios.

Linkfest, lap it up

Michael's Musings

With Richard Thaler winning the Nobel prize of economics this year, our inherit cognitive biases is a popular topic - These Five Cognitive Biases Hurt Investors the Most

Bright's Banter

The media has portrayed hedge fund managers as crooks, liars, corporate gangsters, greedy, fat capitalist pigs that prey on the rest of society. Even the best investor of our time Warren Buffett (a person who started as a hedge fund manager) doesn't like these guys. So what's the story? To try remedy this perception of an ugly fat man in a speedo, I will be sharing a story of a very charitable hedgie. Remember that hedge fund managers are human too, they also have varying human characteristics!

What the media doesn't tell you is that hedge fund managers, as a profession are the most charitable people, when compared to any other profession on earth. They contribute more towards fixing the inequality gap than most government will ever achieve.

George Soros has endowed $18billion of his personal net worth to his charitable foundations, dubbed the Open Society Foundation. It takes its name from a philosophical theory, by his all-time favourite philosopher, the Austrian-British Karl Popper. Open Society has been active all over the world, combating issues ranging from human rights, public health, gender inequality, education, promoting democracy, supporting refugees, fighting hate crime etc.

George Soros is a Hungarian emigre who lived through communism and Nazi occupation of his home country, Now you can understand why all of the causes above are so close to his heart. He really cares about changing the world. The Open Society Foundation is probably the second biggest charitable foundation after the Bill & Melinda Gates Foundation.

Thanks to Stanley Druckenmiller, who used to work for Soros, for calling all of these billionaires out for not giving away their riches to charity. There is no point in hoarding that much cash. There's an old saying, "he who dies rich dies a disgrace!" A wise man once said, "If you're in the luckiest 1 percent of humanity, you owe it to the rest of humanity to think about the other 99 percent."

Karl Popper would be proud!

George Soros Transfers $18 Billion To His Foundation Creating An Instant Giant

Home again, home again, jiggety-jog. Things are heating up in Spain, global markets are red across the board. Data out this morning showed China grew 6.8% over the last 12-months while their retail sales are growing faster than estimated. Uk retail sales on the other hand, shrunk by 0.8%, not good news for the likes of Brait and Steinhoff. Then later today, we have US Jobless Claims data out.

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Friday, 6 October 2017

Netflix and Pay

To market to market to buy a fat pig. Last month intellidex, a research firm focusing on the financial sector, released a report titled The Myth of Corporate Cash hoarding. The basic conclusion is that RSA corporations aren't holding that much more cash on their balance sheet than they have in the past.

Given that the biggest companies in RSA are all multinationals, the data doesn't strip out cash holdings in Rands or international companies, and more importantly doesn't strip out investment in South Africa vs investment offshore. Having a look at the picture below of top 10 companies in the study, BHP Billiton don't have South African operations, Richemont only have a handful of stores in South African and Sasol are sending all their spare cash to the US to build the ethane cracker.

A worrying finding for jobs in South Africa, is that the expected return on new mining projects is lower than the cost of capital (interest rate on debt), which means expanding will shrink profits instead of growing them. The final paragraph of the report, sums up all you need to know though.

"Cash holdings are directly responsive to economic policy. A policy environment that promotes economic growth and provides certainty is likely to reduce firms' caution about economic conditions. That will free up cash for investment, while improved policy is likely to improve prospective returns on investments. Ultimately, company investment decisions are driven by the prospect of good returns, and the current trajectory of declining economic growth is dimming those prospects."

Market Scorecard. Our market broke into the 57 thousands for the first time yesterday, joining its US counterparts at record highs. Here is the scorecard, the Dow was up 0.5%, the S&P 500 was up 0.56%, the Nasdaq was up 0.78% and the All-share was up 0.44%.

Linkfest, lap it up

One thing, from Paul

Josh Brown is a top class blogger. He's a New York-based financial advisor, and CEO of Ritholtz Asset Management. He's a regular on US CNBC's lunchtime show Fast Money, and a great follow on Twitter.

In this post from yesterday, Josh wonders why US stocks seem to consistently trade at higher valuations than those in European markets. A similar big-cap blue chip sector leader in the Euro area trades about 70% cheaper than its US counterpart. Here are his concluding paragraphs:

Structurally, [the US] has higher margins, cheaper equity capital and a better tax system (despite the spurious claim that taxes on US corporates make us non-competitive – it's actually not true). We also have more flexible labor markets here and are better at refinancing debt at lower rates. The most interesting question is whether or not this premium will exist forever. Or, if it is permanent, should it really be 70%? And what will be the drivers of this spread narrowing in the future – falling US price/book or Euro indices rising to meet ours at higher levels?

Read the whole thing here - Why Are European Stocks Chronically Cheaper Than US Stocks?

Byron's Beats

When Warren Buffett speaks, people listen. He was on CNBC a few days ago and as always was very entertaining. This Market Realist piece goes through each topic that he touched on. If you are interested in US stock valuations, Guessing the stock market, US taxes, Wells Fargo, Bank of America and Index funds, click on the link below - Buffett's Latest Word on Stock Valuations, Holdings and Taxes.

The Netflix share price popped 5% yesterday to an all time high of $194. The stock is up a whopping 1944% in 5 years. The reason for the share movement was because they announced an increase in the pricing of their premium products (HD and 4K streaming on various devices). Netflix is raising prices, especially if you like 4K. The market clearly thinks that subscribers will easily absorb these increases so that they don't miss out on the second season of Stranger Things.

Normally when Amazon take something on, they win. If I were a delivery service I would be worried. This Bloomberg article titled Amazon Is Testing Its Own Delivery Service to Rival FedEx and UPS explains the new efforts Amazon are taking to go more mainstream in delivery. Just cutting out another link in the retail chain in order to make things cheaper for the consumer.

Home again, home again, jiggety-jog. The Asian markets that are open today are up this morning and European futures are green. For consumers, a strong Dollar and high oil price doesn't bode well for our petrol price going forward and by extension lowers the chance of an interest rate drop when the MPC meets in November. It is that time of the month again, non-farm payrolls number will be released in the US; the number is probably less significant this month given all the noise and once off impacts created by the two hurricanes. Good luck to the Bokke and Proteas this weekend. Next week Asian markets will be back to normal.

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Tuesday, 18 April 2017

Game of Content

"We know the deal. Facebook and YouTube have adverts and attract many more eyeballs. Netflix is paid for content. Netflix is at the early stages of a global revolution in content generation and content serving. Some of the older and more traditional (one-way) content providers have been unable to breach certain ceilings in subscriber numbers."

To market to market to buy a fat pig Markets in Jozi, Thursday (a while back), closed marginally lower on the day. Financials and banks were the winners on the day, resources slipped around half a percent by the close. SA inc. got another lift, Shoprite and Woolies, as well as Tiger and FirstRand at the top of the leaderboards. Dollar weakness translated to Rand strength, meaning that Rand Hedges were going to be under pressure. Coupled with the weaker commodities complex, it was unsurprising that the likes of Glencore, South32, BHP Billiton and Richemont all lead the losers. Losers in share price, not as businesses, that is important sportslovers. Notwithstanding that, Sappi clocked a 12 month high.

The Rand has done more firming over the last few days, back to levels seen in early February. What is that about? I guess we will have to see what international flows are likely to look like in the coming months. 6 months is my best guess of the unintended consequences of a negative credit review. The finance minister has been talking long and hard about fiscal discipline and fiscal consolidation and wanting to stave off Moody's from a downgrade to non-investment grade. The mood has looked gloomy to say the least. We shall see what transpires.

Stocks in New York, New York, have had two sessions since we signed off. Last evening, notwithstanding the geopolitical tensions that exist out there, stocks ramped up sharply. The Dow, the S&P 500 and the nerds of NASDAQ all rallied around nine-tenths of a percent. It was a broad based rally, industrials and financials leading the charge. We are pretty close to being in the middle of earnings season, this week and next week (and the one thereafter) will be huge. We have started already, there were the banks last week, which on balance were better than most people anticipated.

Wells Fargo reported last week, we will revert with those earnings review tomorrow. The stock reacted negatively, a bottom line beat versus a top line miss, the stock still looks cheap. Over the last five sessions the stock is down nearly 4 percent. Equally, YTD it is down over four percent, it has not been easy for the financials. The news that Berkshire, for regulatory reasons, reduced their holding in the company, also has put some heat on the stock price. In other words, Berkshire cannot own more than ten percent of a bank stock, as per regulations. We will review and revert.

Company corner

Netflix recorded numbers post the market close last evening, they are always presented in an orderly fashion via a shareholder letter from co-founder and CEO Reed Hastings - Q117 Letter to shareholders. For the time being the main metrics to focus on for the company will be the number of subscribers that they can continue to add, coupled with the most important thing for the subscribers, namely, content. Revenue growth of nearly 35 percent year-on-year, on net additions (of subscribers) of around 5 million (3.53 in their international business). Total subscribers (paying members) nearly reached 100 million, with a roughly even split between the US and their "international" business. Subscriber numbers were actually short of company and the Street consensus.

Content matters more than anything else in this business. At the end of the day, all the original content being generated is going to attract new and keep existing costumers. And that will mean spending heavily in order to keep up with all the traditional providers and then of course, those folks that may be newer entrants into this heavy streaming space. It is a constantly evolving space between new and existing platforms. Cord cutters are many. If you only need access to movies and series, then this is for you. If you desperately need to watch sport and love that (I do), then you need to find another way. Expect more streaming sports in the coming years, where people can pay per program viewed, either live or with a short delay. Sport, you have to, have to, watch live.

The earnings transcript is always a great place to find information about the business (you'll have to sign up for the free service) - Netflix's (NFLX) CEO Reed Hastings on Q1 2017 Results - Earnings Call Transcript. What Netflix can do, is always to partner with eager local content producers who want their content to have a global audience. I have watched some international movies with subtitles, the content is magnificent, it is just out there without big enough audiences. Of course the factor that keeps these countries with poor internet infrastructure away from the main drag is exactly that, bad internet speeds. As those improve, no doubt the ability to grow across emerging markets exists.

What is interesting is that Reed Hastings says that they have YouTube envy. He suggests that the company is at the early stages of internet movies, whilst YouTube and Facebook have a much larger audience. Except the content you watch on both of those channels is normally shared by people of a like mind (Facebook), or is a search function (YouTube). Netflix is served to you, and whilst the review process has changed recently (from 5 stars to thumbs up and thumbs down), it does take a little longer for the company to get the "mix" right. They experienced this first hand in Brazil, a massive market with a growing middle class.

We know the deal. Facebook and YouTube have adverts and attract many more eyeballs. Netflix is paid for content. Netflix is at the early stages of a global revolution in content generation and content serving. Some of the older and more traditional (one-way) content providers have been unable to breach certain ceilings in subscriber numbers. If you buy Netflix now (at nearly 150 Dollars a share, a 63 odd billion Dollar market cap), you are certainly buying the future. Revenues should continue to grow at a healthy click, earnings are not likely to exceed 3 Dollars this year. Which means that the stock actually looks cheaper than at any point. If you own them, keep them and definitely pay attention to who is generating content and what the consumer wants out there. Their original stuff is amazing (both reality, series and documentaries), and finally people are finding a young and fresh platform.

Linkfest, lap it up

I am sure that you have always wondered why company spend on advertising is so high, you cannot just make a sweeping statement of "oh, people will always drink XYZ". The Visual Capitalist says this about customer loyalty - Here's 5 Ways to Build Customer Loyalty, According to Science. One piece of research stands out there for me, 79 percent of customers would take their business to a competitor within a week of experiencing poor customer service.

This is amazing! This retailer is showing the power of AI - How Germany's Otto uses artificial intelligence.

"The AI system has proved so reliable - it predicts with 90% accuracy what will be sold within 30 days-that Otto allows it automatically to purchase around 200,000 items a month"

"Overall, the surplus stock that Otto must hold has declined by a fifth. The new AI system has reduced product returns by more than 2m items a year."

Talking of future technology impacting our present day lives, 3D printing parts is and will be huge for the aeronautical industry - 3D-printed titanium parts could save Boeing up to $3 million per plane

Home again, home again, jiggety-jog. Stocks have started lower here across the board, Resources stocks as a collective down around two percent for starters. Long4Life (the Joffe SPAC) is heading lower and finding a level, perhaps somewhere around the cash level is appropriate.

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Friday, 20 January 2017

Netflix Crowned King of Content

"Content creation is the moat around the company at the moment, it is what differentiates Netflix from other streaming providers. The Crown, a series that depicts Queen Elizabeth's life, won Best TV Drama & Best Actress of TV Drama at the Golden Globes, so their push into new content is working."

To market to market to buy a fat pig Local was lekker for a while. We listened in to Theresa May's speech about the awesomeness of Britain that it needs a Great in front of it. Has a good sound to it. I suspect the first new thing that Donald Trump should do as US president is rename the country to "Great United States of America". Now that it has been made great again. Apparently Ronald Reagan used that line first - Make America Great Again. What about making politicians great again? So that they can use public transport, send their kids to public schools and public health facilities? Most importantly, institute term limits for politicians. 8 years, or something like that.

Anyhows, we are getting off topic here. Jozi stocks as a collective closed down a smidgen. Industrials were the only sector that kept us from slipping more on the day, there were new twelve month highs for a whole host of SA Inc. stocks, from Capitec to Astral, DisChem to Adcock (a positive trading statement), Tongaat to PSG, you get the picture! In amongst the majors, British American Tobacco and by extension Reinet, were at the top of the leaderboards. Bidcorp and Aspen were there too. In the losers column were the precious metal stocks, AngloGold Ashanti and Amplats were leading the pack. Banks and financials, as well as retailers, who have been beneficiaries of a recent rally, slipped away from the best levels in a number of weeks.

In New York stocks slipped last evening, perhaps it was the fact that the Fed saw the labour market tighten (meaning higher wages were next), which meant that rates would go up on cue, three times this year. Not everyone is a believer, how can you blame them when Stanley Fischer said rates were likely to rise four times last year. And we got a single rate hike at the end of the year, so even the insiders had little clue as to what was likely to transpire. Unfortunately for exceptional economists, they too have to make forecasts and then shift them as the incoming data changes. This is no different for the great Stanley Fischer. Anyhows, stocks slipped away, we closed down just over one-third of a percent on both the Dow and the S&P 500, the nerds of NASDAQ were lower by around one-quarter of a percent.

Once again energy stocks took some heat, healthcare stocks sank just over four-fifths of a percent, there are (to use a Rumsfeldian) many unknown-unknowns. And they may be YUGE, they may just be hot air. Whilst there is a great swear in of the 45th (and most important ever in the history of everness) President of the USA, there is the small matter of earnings season that continues today. It is the turn of General Electric, a stock that we used to own, no longer. The one constant of the Dow over the many years. Next week is a cracker, as is the week after. You know .... I cannot wait!

Company corner

Whoa, Netflix continues to crush expectations. On Wednesday after the market close they released their 4Q results & shareholder letter. The stock shot up 8% in after hour trading. At the close of trading yesterday it only ended up 4% after all was said and done. Compared to the same time last year, streaming revenue is up 41% to $2.35 billion for the quarter. The numbers people were more interested in was what the subscriber growth looked like and the growth didn't disappoint (see below).

Note on the above image, that it says that subscribers up until 2010 includes, DVD subscribers. As most of you will know, Netflix started out as a DVD hire company, where they post you the DVD, you watch it and then post it back to them. What most of you won't know is that Netflix still has 4.1 million subscribers using their DVD service!. When was the last time you watched a DVD or even saw a DVD shop? Now add into the equation using the Post Office, talk about old school tech. This part of the business is profitable though, generating a profit of $68 million for the quarter and more than off setting the loss of $67 million from the international streaming devision.

As Sasha points out, Netflix has made 3 rather big transformations in a relatively short period of time. They started as a DVD company, then changed to a streaming company and now they have changed into a content producing company. House of Cards was their first big hit but since then they have spent billions on content, forecast to spend a whopping $6 billion on content creation in 2017.

Content creation is the moat around the company at the moment, it is what differentiates Netflix from other streaming providers. The Crown, a series that depicts Queen Elizabeth's life, won Best TV Drama & Best Actress of TV Drama at the Golden Globes, so their push into new content is working.

All this growth comes at a cost, from a valuation point of view the stock is trading on a trailing P/E of 374 and a forward P/E of 69. On a business level the company is spending huge amounts of money up front to grow their content base but also grow their international market with the result being that they are going to have negative cash flow of $2 billion for 2017! All in all this is not a stock for the faint hearted. The key question that you need to answer yourself is, will they continue to create block buster content? If the answer is yes then I would say this stock is a buy for your 'outliers portfolio'.

Linkfest, lap it up

Not the biggest release, yet I saw reference here to a Google purchase of Fabric from Twitter. From the Fabric website: "Fabric is a platform that helps your mobile team build better apps, understand your users, and grow your business." Herewith the Google release - Welcoming Fabric to Google. As Francis Ma says: "The integration of Fabric is part of our larger, long-term effort of delivering a comprehensive suite of features for iOS, Android and mobile Web app development."

A cracking interview of Bob van Dijk, Naspers CEO, by veteran journalist Alec Hogg (who is now based in London, as far as I understand it) - Naspers' youthful CEO, able custodian for 20% of the JSE. A few important things to take away: " ... we have no intention of selling Tencent's shares ... " and this should tell you a lot about the current and ongoing strategy: " ... We've always been a long-term company, that's not optimised for short-term returns ... ". On OLX, a business that they are starting to ramp aggressively: "I mentioned OLX earlier, that's simply a business model that might take five odd years before you see any return on that investment." There you go, we remain buyers of this business.

Staying on Naspers for a while here, Bloomberg reports: Africa's Biggest Company Seeks Phone-Company Partnerships. Streaming content through smartphones and tablets, using the existing infrastructure supplied by the likes of Safaricom (as the article points out, 40 percent owned by Vodafone). Did someone say fibre?

Reuters reports - Panasonic aims to move Tesla auto partnership beyond batteries: CEO. The Panasonic CEO refers to "organic photoconductive film CMOS image sensors". Huh? Check it out - Panasonic Develops Industry-First 123dB Simultaneous-Capture Wide-Dynamic-Range Technology using Organic-Photoconductive-Film CMOS. You will recall that the Tesla self driving sensors failed against the blue sky in that incident (Tesla's Self-Driving System Cleared in Deadly Crash), the one in which the single occupant was killed. He was watching Harry Potter at the time. Meanwhile - The Surprising Reason Tesla Could Jump 25%.

The Apple rumour-mill rolls on, this time with wireless charging. Why not, the watch charges wirelessly! 9to5Mac reports iPhone wireless charging reports continue as rumoured supplier sees share price surge. We like Apple as an investment. I keep saying that I am waiting for the assistant, like Alexa, the Amazon version.

Staying with the Netflix theme (somewhat), sometimes people just get it WRONG, and it is very easy to bash them for it. Hindsight, science .... you know the saying. Read this, the close ended fund CUBA story is just downright crazy, worse than the sell Netflix story - Sell Netflix, Buy Blockbuster.

It is Friday. So this is a long article for weekend reading. We don't invest in companies that sell something that is likely to come under increased scrutiny in the coming years. Unfortunately for consumers of liquor, this is an area which is likely to see higher excise duties and higher regulation. Booze has a fascinating history and connection to humanity, as you discover in this detailed piece: Our 9,000-Year Love Affair With Booze

Home again, home again, jiggety-jog. Davos wraps up today, this has been the first year that I have really enjoyed the coverage from the Swiss town below the awesome Alps. The pictures are pretty breathtaking, the cold looks fun if you are having a good ski there. No falling now. The Chinese have reported a GDP print that has met (or slightly topped) expectations, driven by consumption - China GDP hits 2016 target as Trump headwinds loom. Stupid observations about the economy slowing to 1990 rates, 6.7 percent on 11.4 trillion Dollars equals 763 billion Dollars. The entire economy was 314 billion Dollars in 1990. I would have preferred a headline, China economy adds more than double to their already YUGE economy. Adds double the entire economy in 1990.

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Tuesday, 18 October 2016

Buy Netflix and Chill

"The company will continue to attract more and more customers as bandwidth improves across the globe. We continue to be very optimistic about the future of this business, we will have to watch the trends very closely however! We continue to accumulate, the stock has popped sharply post the results, thanks to the comfortable beat."

To market to market to buy a fat pig The Rand is firmer, that is being attributed to the deputy president standing behind the finance minister, or so we are to believe. The Dollar index is also a little weaker against a basket of currencies, I did notice that the Dollar Euro exchange rate went through the 1.10 mark. Stocks sold off, led by industrials, financials were the only stocks that were up. Well let me rephrase, of the majors, financials and banks were the only stocks that were better on the day. FirstRand and Standard Bank at the top the majors leaderboard, Richemont after a monster week last week slipped sharply, down over 3 percent. Tiger Brands also found themselves deep in the red, down over two and a half percent as the company received a broker downgrade. The more I do this the less I pay attention to the short term moves.

I told this story to one of my favourite clients yesterday (you are all my favourites), and it relates to an irritable Johann Rupert at a Richemont results presentation. It goes something like this, forgive me if I don't get it one hundred percent right. The board of Richemont is being grilled by the analyst community, asking why don't you do this, what about that and so on, smart and pertinent questions from the analyst and investor community. A visibly out of comfort Rupert pointed out that the board had years and years of experience, on average (if I remember right), close to 15-20 years each. At Richemont alone.

He then asked the analyst community in front of him, who had worked for their present employers for around five years. Two-thirds of the hands went up, he then asked who had worked around ten years, fewer hands went up. He then asked who had worked for their present employer for much longer than ten years, and said that he knew the answer. I think it was a single fellow, it may have been two. His (Rupert) point was simple, how can you possibly tell me and the board how to run our business here, when you cannot even stay at your own job for more than five years, average. We are trying to build a long term business here, not please the analyst community. And I remember being struck with his comments and thinking, you are right, here we sit and judge and suggest that they should do x and y, the managers of the business have everything to lose reputationally and for their shareholders.

It is a bit like cricket. As a batsman you can make one mistake and it is over. As a bowler, you have six balls, you go away and think about it at long leg and then you come back and start all over, with another six balls. As an owner of the business you can, as the batsman, choose to attack and defend and make sure you never "get out". If the folks that run a business obsess about the share price a lot and less about the business, be wary. Anyhows, as usual, Rupert in his own special and marginally gruff way nailed it. I think straight after that comment he lit up a cigarette during the televised meeting (he has quit smoking since then). And that is why if you and I are into ownership of a business, broker upgrades and downgrades come and go. Whilst they are important and well thought out, they are definitely not the be all and end all of investing. On the contrary. I can't believe that we throw so much weight behind what is essentially a prediction, like anyone else. Tough out there.

OK, quick market round up here, the all share fell three-quarters of a percent to end the day at 50769 points. The one year return is down 4.54 percent. The Rand is "quite strong", 14.08 to the US Dollar, 17.19 to the Pound (I can't hear the Barmy army singing now) and 15.51 to the Euro. Good work Mr. Rand. Randelas! Just remember that if you have cash and are being reckless with it, Tata Madiba is smiling at you and urging you to be more frugal. Save more!

Over the hills and far away, where earnings season has kicked off, it was a dull day for stocks. Mostly hugging the thin red line until the second half of the session, where stocks fell away, ending the day marginally lower. The nerds of NASDAQ fell a quarter of a percent, both the Dow Jones Industrial Average and the broader market S&P 500 fell 0.28 percent. Energy stocks were the main losers, down over half a percent as the oil price drifted away.

I don't think that the oil price freeze is going to stick, many of these governments have hectic obligations and were factoring in much higher prices. I have read stories about Saudi civil servants having it tough, this is bizarre though - Cash-strapped Saudi Arabia switches to Gregorian calendar to pay civil servants less. Wage cuts aplenty overtime and annual leave payouts capped. Believe it, salaries accounted for 45 percent of Saudi government spend in 2015. It is always very important to have a diversified economy and to encourage risk taking. The news may continue to be not so good for civil servants in that part of the world.

Company corner

There were a few management shuffles announced, the Caterpillar CEO Doug Oberhelman is set to "retire" earlier than planned, the journal cites ill timed bets on China. And mining equipment, read Bucyrus. Sales are down every year since 2012, mining spend has been cut back as a result of the commodity prices retreating from record highs, oversupply and the demand side cooling. It is not that the main customer has stopped buying, the rate of growth is lower. And supply is so much more. And by extension the equipment purchases have slowed. And Doug Oberhelman is the "coach", he takes the rap. I guess someone has to, right?

Visa announced a CEO succession plan, indicating that CEO Charlie Scharf would resign as he cannot commit 100 percent to spend the time in San Francisco. What the hell? Does he not like catching the tram or something? Does staring at Alcatraz give him the heebie-jeebies after watching that dumb movie with the green balls and Nicholas Cage? Is he a cyclist or runner and the hills are getting him down? Or is the family life taking strain and the commute too much? Whatever the reason, Alfred F. Kelly, Jr. (not related the Alfred E. Neuman) will assume the reigns of what is an incredible opportunity for him personally. A 23 year veteran of American Express, Kelly was in charge of Global Consumer and Consumer Card Services groups. Yes. Kelly is currently a board member at Visa, the company and the culture is nothing new to him. Scharf will deliver results for the last time next Monday evening. Look out for those sports lovers. I personally cannot wait.

Netflix reported numbers after hours, the company has certainly kept relevant with the times. They used to be a DVD mail order business. You remember mail? Oh, and you remember what a DVD was too? And I am even guessing that you remember what a Blu-Ray was too? Don't feel too bad if you still buy those things, you are certainly not alone. And you remember dial up internet, the thing that used to ping and twang and make that amazing "handshake" sound? Ha ha, those were the days my friends, when websites had very few images as the internet speeds sucked so bad you couldn't download anything except some text. And a few images here and there. Nowadays we want a pipe into our living room to serve us nothing but the best streaming entertainment. Personally I am a Netflix user, I enjoy the original documentaries. That stuff from Netflix is good, I have watched the "Chef's Table", season one and season three (the French version - not finished yet). World class, for any foodie it is a must watch, plenty fun. Dan Barber and Massimo Bottura were my favourites.

OK, I know you couldn't give a rolling donut what my favourite shows are. We are more interested in the Netflix Q3 numbers. This is the first quarter of more than 2 billion Dollars of revenues. There are now 87.78 million paid subscribers around the world, paid memberships outside of the US has clocked 40 million, growing at a breakneck speed. The company is still making a loss in their international business, it will be about scale in he end, scale and most importantly content. I am a scaredy-cat and I am unlikely to watch Stranger Things (Byron says it is good, Ill take his word for it), and the second season of Narcos, these new shows are being lapped up by the customers.

All of the metrics were ahead of their guidance, net income clocked 52 million Dollars, earnings per share for the quarter was 13 US cents. Operating margins are 5.1 percent, they are interestingly seeing margin expansion, up 90 basis points since this time last year. We were discussing the customer numbers here in the office, the slackening of the US numbers and the ramp up of the international numbers may well be as a result of the crackdown on IP masking. i.e. trying to fool the inter-webs as to where you are coming from, in order to access the full US content. As the content improves in the offshore environment there will be more and more international users. It is an amazing concept. Netflix accounts for around 35 percent of all North American internet traffic. Makes you think, not so?

The biggest risks to a business like Netflix is not being able to deliver the content. It is incredibly easy to quite simply turn the Netflix tap off. Take a break from the service to use one of the competitors. Amazon for instance are spending a lot more on content and have the ability to be able to ramp up more, they certainly have an awful amount of resources over there in JeffBezosVille. The company will continue to attract more and more customers as bandwidth improves across the globe. We continue to be very optimistic about the future of this business, we will have to watch the trends very closely however! We continue to accumulate, the stock has popped sharply post the results, thanks to the comfortable beat.

Linkfest, lap it up

This is an impressive creation of wealth - China gets a new billionaire every 5 days.

The weakest part of any secure information, is the flesh and blood that controls the passwords - Russian Hackers Faked Gmail Password Form To Invade DNC Email System or in this more extreme case, where US and Israeli hackers managed to attack the Iranian Nuclear program thanks to someone inserting a compromised drive into their computer - Stuxnet Attack On Iran's Nuclear Plant.

I love it when marketers think out of the box. Having drones hovering above drivers, 'sledging' them is a very clever way to get your brand noticed. It is probably also illegal in many countries - Uber's Ad-Toting Drones Are Heckling Drivers Stuck in Traffic

Home again, home again, jiggety-jog. Futures are higher across Europe, this is a big earnings week across the US. There is a small matter of Chinese GDP tomorrow. More exciting is that JNJ report tonight. Stand by sports lovers.

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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Thursday, 21 July 2016

The Netflix Fix

"The model is pretty simple. Movies and series on demand, as and when you want to watch them, you pay one monthly fee. The company has also evolved from other peoples content to their own original content, some pretty awesome series too."

To market to market to buy a fat pig The BusinessInsider graph of the day suggested that the Dow Jones Industrial Average has a chance to do something that it (it being the index) has only done 6 times since 1980. And that is to close up nine days in a row. I wonder if closing up nine days in a row and setting new all time highs every day would make it unique? Whilst the post Brexit rally continues, we are up around 8 odd percent since (we are told) the most earth shattering thing to happen in Europe since the fall of the Berlin Wall. I suspect that the conversion to a new currency across the length and breadth of Europe was a better thing, not so? That was more earth shattering.

Still, as Michael pointed out yesterday, Americans don't like stocks (subscription only) from Barron's - The U.S. Has a Misguided Faith in Real Estate. Americans, ordinary ones, don't like stocks. They have been burned twice, in 2000 and in 2008, and enough is enough. In order, according to the Barron's article, it goes House and Real Estate, then cash and CD's, stocks are as good as gold investments. True story. Well, that should make things pretty interesting when (if) the average Joe ever decides to come back to the stock market.

I did find, via the same platform (Barron's) that it is the eleventh time that the Dow Industrials had cracked 7 straight all time closing highs since 1925. There are now strategists, whose job it is to make big bold and non accountable predictions year in and year out, who are scrambling and looking at their targets again. Setting targets tells me all you need to know about that person, they are only looking out for this year or next. I expect that innovative and well run businesses with compelling products and services that humanity needs and wants will continue to print earnings higher and higher (if not consistently each and every year) for the next decade and beyond. The market will continue to rate those particular companies with higher valuations than their peer grouping. I found this very funny, it was a graph that Paul sent us the other day, titled "The history of this is the top" on the Dow Industrials from 1900 to present.

There are always going to be moments to worry about equity market investing. That may be today, that may be next week, next year, in the next decade. You may think that the European Union is a failure, I may think that it is going from strength to strength. As ever in markets, one can always agree to disagree. Every seller needs a buyer, every buyer needs a seller. There are divergent views each and every day, pension funds have obligations to meet for older retirees, younger people with gainful employment are saving for the future, their pension fund (or themselves) are buying the same shares. Conclusion? Don't worry about the headlines. Read them, enjoy them, you are an investor, not a trader.

Company corner

That person who doesn't have consensus. Elon Musk. And perhaps that is a very good thing. If your number 1 priority is to change the world, and to really, really change the world, then best you deliver on your promises/forecasts/plans. Best you do that. Last evening the fellow reminded us of the original Masterplan from ten years ago - The Secret Tesla Motors Master Plan (just between you and me). As you could imagine, he does admit to flying by the seat of his pants, as all great inventors do.

The reminder is ahead of the next stage in the company and their next ten year plan, which he introduced - Master Plan, Part Deux. Again, in the introduction part he points to the milestones. It is interesting that he says, in talking about the plan to make an expensive car that "I thought our chances of success were so low that I didn't want to risk anyone's funds in the beginning but my own." This was the first bunch of plans:

Build sports car
Use that money to build an affordable car
Use that money to build an even more affordable car
While doing above, also provide zero emission electric power generation options
Don't tell anyone.

In unveiling the next leg, he says that the Tesla and SolarCity tie up must happen. He also said that they would build a bus and a truck - "In addition to consumer vehicles, there are two other types of electric vehicles needed: heavy-duty trucks and high passenger-density urban transport. Both are in the early stages of development at Tesla and should be ready for unveiling next year.". He also spoke about ride sharing - "In cities where demand exceeds the supply of customer-owned cars, Tesla will operate its own fleet, ensuring you can always hail a ride from us no matter where you are.". In short, like when he unveiled the first plan, the goals are ambitious, he keeps it very simple however:

Create stunning solar roofs with seamlessly integrated battery storage
Expand the electric vehicle product line to address all major segments
Develop a self-driving capability that is 10X safer than manual via massive fleet learning
Enable your car to make money for you when you aren't using it

I still think that the biggest risk to Tesla is not running out of money, I suspect that people will always back Elon Musk. He eats elephants. He hurdles the Burj Khalifa. I am not going to bet against him. The share price and the valuation of Tesla may well be another talking point altogether, you are never going to time this one properly. The biggest risk to Tesla is without a doubt something happening to Elon Musk. I know that there are other people who work there and share his vision, unlike at Apple which is much older and more established, Tesla is still pretty much an entrepreneurial "feeling" business. I suspect that all the people who work there may tell me otherwise, they (and all humanity) are in the same boat. For the sake of all of us, the kids now and those born in half a century time, I hope Elon Musk is very right.

Another company that has morphed along the way, and is older than you think is a business called Netflix. You may already be a big fan, provided that you have the streaming capabilities here in South Africa. Like the providers of smartphones, you are only as good as your service provider. Netflix will be 20 years old next year at the end of August, the company is the same era as the Amazons of the world, listing at a less opportune time in 2002 after the tech bubble had popped already. It is hard to believe that Netflix has been listed longer than Google. With the advent of high speed broadband, the company was able to change from a simple mail and pickup of DVDs (remember those) to a streaming service. It is so big that the company accounts for one-quarter to one-third of all US internet traffic.

The model is pretty simple. Movies and series on demand, as and when you want to watch them, you pay one monthly fee. The company has also evolved from other peoples content to their own original content, some pretty awesome series too. "Orange is the New Black" and of course "House of Cards". The original of the originals. My watching patterns are erratic at best, sport mostly outside of business TV. That always needs to be watched live and always needs to be watched. There are plenty of people looking for different entertainment, and so far, not only have Netflix been able to deliver, they are a leader. Plus, importantly, you can watch the content across all hardware platforms. PC, Apple TV, Xbox, most set top boxes.

The company announced their numbers post the market two evenings back - Netflix Releases Second-Quarter 2016 Financial Results. Their subscriber base growth for the quarter missed expectations. As they said "We are growing, but not as fast as we would like or have been. Disrupting a big market can be bumpy, but the opportunity ahead is as big as ever and we continue to improve every aspect of our business." Personally, I don't like the word don't and neither do I like the word but. There is lots of competition, they are right. From Amazon, from Hulu, heck, even from YouTube. In fact, YouTube is the biggest streaming service provider in the world, untouchable currently.

Their non-US (what they term international) business is growing like gangbusters. Their core business revenues are growing, perhaps not as much as they would want. And they admit that they are not growing subscribers by the amount that they need and want. Reed Hastings suggests on the conference call that every household in the US may have the service in the coming decades. As ever, the only thing that matters is content, whether it is good or not. Live sports events such as the Olympics are going to disrupt their subscription numbers in the current quarter. These are all the Netflix numbers that you will need, as you can see, the company is profitable, not by too much.

As you can imagine, it matters not whether you have one million or 1000 million (that is a billion) customers, what matters is your ability to be able to continue to grow profits relative to the market valuation. Netflix is NOT going to be a company to own for everyone, there are many questions to answer over the coming years, I am sure they will answer most. The ride is going to be very volatile. Reed Hastings, the founder who stuck in 2,5 million Dollars of his own money at the start (he is now worth over 1.1 billion Dollars). Good work Reed, good work.

Linkfest, lap it up

It is amazing the advances that we make in technology every year. Healthcare advances are the ones that I am most pleased about, if we are going to live close to 100 I would want to be in a functional body - The Top 10 Emerging Technologies of 2016. All these advancements are made possible due to computers but also in part due to our large global population. Our large population means that there are more researchers working on new technologies and more consumers.

Another company joined the unicorn club - Unilever Buys Dollar Shave Club for $1 Billion. It is amazing that selling razor blades for $2.50 can be worth so much, the company only has 3 million customers at the moment. If you have 1 mins 33 sec then watch this great advert from Dollar Shave (Our Blades Are F***ing Great)

Here is a great example of striking while the iron is hot - The world's first 'Pokemon Go' dating service has launched. How many weeks/months do you think the Pokemon Go fad will last?

Home again, home again, jiggety-jog. Stocks are mixed, a little lower actually to begin with. The Dow futures are flat. C'mon there earnings, boost this one higher!

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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Wednesday, 20 April 2016

Ag please daddy can you take me to the Netflix

"The reason to buy this company is because they are the leaders in an area of the market that is growing extremely quickly, Netflix expects to add 2.5 million subscribers over the next 3 months. The company is priced for this growth though, currently trading on a P/E 326. More and more people are cutting the cord of their cable or satellite TV subscriptions and moving to streaming. Europe, with a population of around 740 million, has the infrastructure and income to be the next big market to see growth in subscribers."

To market to market to buy a fat pig The S&P 500's turn last evening for a milestone, this time 2100 for the broader market, the index closed at that level. Same old story as the reasons I read yesterday? Perhaps, less worries about a global downturn, China specifically after their 6.7 percent print on GDP last week, less worries about the whole web connected to the oil price, notwithstanding another stalemate in talks between producers, this time in Doha over the weekend. Opulence, they hads it, now they donts. Say that last part in your deep DirecTV Russian guy accent. If you don't know what I am talking about, then be sure to watch it, an old classic -> Opulence, I Has It.

I suspect that it is none of those things, rather the fact that we are now in the guts of the best season. Not the IPL, that is a pretty great season every year, certainly not autumn here, whilst the lower temperatures are welcome, the lack of rain is not. No, my friends, we are in earnings season. Something that happens four times a year. It is when you get to see what companies say about their prospects, their last 90 odd days, how they see their specific operating territories stacking up, their business segments relative to their peers. And so on. That is what we get excited about here, after all, we are market nerds.

It was a mixed bag of earnings, Netflix missed some lofty expectations, Goldman Sachs earnings took a hit, it was however a beat, IBM missed badly and the stock was bashed, JNJ delivered a broad based earnings beat and the stock climbed to what looks at first glance as an all time high. More on some of those specifically in our company segment. There was also numbers from Intel after-hours, the company is shedding 12 thousand jobs as PC demand continues to hit the skids. In what looks like a low volatility session on Wall Street stocks eventually closed mixed on the day, the Dow managed to pull off another day of gains, stocks in the materials and energy sector drove the overall market higher, the nerds of NASDAQ weighed down by IBM and friends, closing off 0.4 percent. The broader market S&P 500 rallied just shy of one-third of a percent, the blue chip Dow Jones Industrial Average added a little over one-quarter of a percent.

There was a global story that attracted a little attention, the fact that Argentina were returning to the debt markets and were possibly going to see a serious oversubscription for their issuances. Yes, after a decade and a half of being shut out of markets, lengthy court battles, seizures of sailing navy ships in West Africa (yes, true story - Seizure of Ship From Argentina Forces Shake-Up) and most importantly a political change. A political change that has recognised that the crazy socialist economic policies, currency fudging, inflation covering up and so on, doesn't work, let the market of the collective decide. It is proof that change can happen, it takes rock bottom on what (in my view) are dumb policies that help nobody.

OK, away from that, let us take a peek at what markets did here in Jozi, the place where the sun shines a lot, the place that was founded on a large pile of gold. Gold that is still being extracted on the side of the M2 highway, as far as I understand it. By what are termed "illegal" miners. Perhaps it is best to call them opportunists and true capitalists, even if the desperation drives them to flirt with extreme danger. And bear in mind that the mines still belong to someone else, even if it is not being currently mined. Locally the market was a bit of a mixed bag, stocks rallied into a stronger close, up 0.4 percent as a collective on the day.

Not much by way of earth shattering numbers from any of the majors, there was of course the news that AB InBev had accepted an offer of around 3 billion Dollars for Peroni and Grolsch, from Japanese business Asahi Group. This is a continuation of the deal having to happen, sales of parts where there is competition, concessions here and there. This is expected, AB InBev stock rallied over two percent here. Over the last three months in Rand terms, the stock is down 3 percent, in Europe over the last three months (in Belgium), the stock is up 5.1 percent. The currency is a double edged sword, the difference is pretty huge between the two prices and their respective performances. AB InBev in Euro terms is around 8 odd percent away from the 52 week highs, whilst the Euro Stoxx 50 seems around 20 percent away from their 52 week highs. Interesting. Where is the love for European stocks?

Company corner

L'Oreal reported sales for their first quarter two days back, the stock has certainly caught a bid. Herewith the release, a fun read on what is a really great company that produces excellent products, known across the globe -> First quarter 2016 sales. A picture, or in this case, a picture of the table of sales tells you more than a thousand words. Strong emerging market growth, mostly Eastern Europe, Latin America and Africa and the Middle East. Kenya and South Africa get a mention there, solid expansion the company says. Here is a sales breakdown, by product line and by region.

Professional products, that is the retail offering that lets you experience the same sort of quality that you can in the salon, all brands for ones hair from Kerastase to Redken. Consumer products is possibly the best known of all the products, the makeup/cosmetics division, sold through their mass market channels. In other words, available in most shopping places. Garnier, Maybelline, and of course the big daddy, L'Oreal Paris. The stated goal from the company is to have over one billion customers. Waking up each and every morning and putting on makeup, for all skin types. Equally, with shampoos and conditioners, all hair care products have to meet the same standard across all hair types, if memory serves the company advances their hair care technology in Brazil, as that territory sees all hair types. The true melting pot of the world, as far as hair is concerned then.

There are two other premium brands, one a skincare, makeup and fragrances businesses called L'Oreal Luxe that sells well known brands. Many under licence from the fashion houses of course, no different to the way that Luxottica manufactures and sells sunglasses. These brands sold under L'Oreal Luxe include Lancome, the premium perfume and skincare house (subsidiary of L'Oreal since 1964), as well as manufacturing perfumes for Yves Saint Laurent (owned by luxury brand company Kering), Giorgio Armani, the Italian private fashion house, Cacharel (Anais Anais is nearly 40 years old now!), as well as many others.

Lastly, the Active Cosmetics Division includes well known brands like Vichy, SkinCeuticals, Roger & Gallet, Sanoflore and La Roche-Posay. This particular segment, as per their website, is the world leader in dermocosmetics. Loosely defined, dermocosmetics is the science where both health and beauty meet in the middle, a very fast growing segment globally. The products are designed to both enhance beauty as well protect the skin, with increased pollution and awareness around the damages that the sun can do, I expect this to be fast growing and adapt to changes.

This business ticks many boxes, high margins, attractive mass market appeal for an iconic global brand in the soft luxury segment. I think most importantly however is that the stock price has "done very little". Whilst this may sound counterintuitive, if you want to add to a position over a longer time, you want the price to be as low as possible. The stock is currently at 38.23 Dollars, the recently weaker Dollar to the Euro has been good for the Dollar price. Which is of course the one we own. The stock has basically "done nothing" since the middle of 2013. Over five years the stock in Euro terms, as per the Paris listing, is up nearly 100 percent, in other words, it has nearly doubled. We don't own specific stocks for the currency moves, those will normalise over time. We own them as a quality standalone business with huge growth potential, we have been patient holders, the stock is certainly not cheap, we believe the opportunity and thesis still remains. We continue to accumulate.

On Monday night we had numbers from Netflix whose content fills our living rooms on a regular basis. Here is a pdf of the Netflix 1Q 2016, Letter to shareholders.

Netflix is not a stock that we talk about very often, so here is a quick run down of the company. The company started in 1998 as a DVD-by mail company. Basically you rent a DVD from them, they post it to you and then when you are finished with it, you post it back to them. Then in 2007 they started their streaming service, expanded the streaming service to Canada in 2010 and now 6 years later they are in 190 countries. The streaming service started with streaming just content from other studios, mostly sitcoms from the 80s & 90s. The big drive now is to produce your own content to attract new subscribers. Their most well know series is House of Cards, very addictive! The service itself isn't very expensive, you can sign up for $8 a month, much cheaper than Dstv, BUT there is no sport.

Revenue for the quarter was $1.95 billion up 24%, of that only $144 million is from the legacy DVD business which is currently fading quickly. Currently their subscriber base is 81 million million people and growing quickly. Over the last 3 months they added 2.2 million new subscribers in the US and 4.5 million International subscribers. The core of their base is still in the US with 47 million of the 81 million subscribers there, the major growth going forward will be the international market. Net income was only $27 million due to them ploughing large amounts into content creation but as the subscriber numbers grow so will their margins. Once the show has been created it is relatively inexpensive to stream it to an extra subscriber.

Going forward the plan to keep subscriber growth on the up is to spend $5 billion in 2016 on content creation and to focus on stepping up production of non-English series. The company has also been working on making their code more efficient, so that people with slower internet connects will be able to also be a client, their efforts have resulted in a 20% saving in data usage.

The reason to buy this company is because they are the leaders in an area of the market that is growing extremely quickly, Netflix expects to add 2.5 million subscribers over the next 3 months. The company is priced for this growth though, currently trading on a P/E 326. More and more people are cutting the cord of their cable or satellite TV subscriptions and moving to streaming. Europe, with a population of around 740 million, has the infrastructure and income to be the next big market to see growth in subscribers. Over the long run there are still around 4 billion people who are not connected to the web, each person coming online is a potential customer.

The stock closed down 13% on Tuesday because the market was expecting subscriber growth of 4.1 million people for the coming quarter instead of the forecast 2.5 million. Clearly high expectations on the company but if you are looking for a small allocation in your portfolio of a "next generation" stock considering buying Netflix. Streaming content is the future, no doubt about that. Will that translate into big profits for the content providers or will the market become too competitive? Only time will tell.

Home again, home again, jiggety-jog. Stocks across Asia are mixed, Shanghai markets were down heavily earlier, they have since recovered a little. Still down over two percent, at one stage it was as bad as four percent. Japanese stocks are marginally better as we speak, Hong Kong markets are down along with mainland China stocks. European futures pointed to a lower open there, so far we are down around two-thirds of a percent. Visa, Alphabet (Google) and Starbucks all with results tomorrow. How is it possible that three of the greatest companies in the world all report on the same day?

Sent to you by Sasha and Michael on behalf of team Vestact.

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