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NFLX (Part 3): An Expensive But Stunning Media Powerhouse

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**Part 3 is meant to be an informal assessment of NFLX based on observations and through discussions with people, without precise financial data.

For Valuations, I am not going to delve too much into it as I have not assessed them myself. (Will do that sometime soon)

For now, I am just going to opine on the attitudes to take when the stock has already gone way up.

Looking briefly at Yahoo Finance, Netflix shows us a P/E ratio of 133 times. That is unheard of in any of Buffett’s investments (except during the peak of a bubble). However, before we dismiss Netflix as a whole, we should remind ourselves that this is still a “tech” company being viewed by Wall Street and most investors. Tech companies generally have pretty high valuations – although if we compare to the other FAANG stocks, their PEs aren’t as crazy as this one.

Nonetheless, we should keep in mind Munger’s quote, which I will append below:

“Over the long-term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result (emphasis mine).”

Charlie Munger

The return on capital is apparently very important in the Buffett-Munger book. Looking back to Netflix, we see that ROIC and ROC have been quite unstable – hovering at an average of around 10-12% for the last 6 years.

At a 12% average ROIC, would you be willing to pay the current price of $300+ a pop? Personally, I wouldn’t. Furthermore, Munger says “if the business earns 18% ROC over the next 20 or 30 years”… This is an average ROC, which assumes some sort of predictability in its ROC trend. Looking at the last 10 years for Netflix, ROC/ROIC/ROE has been pretty unstable due to its inherent “tech” nature. However, looking since 2012, it has been doing pretty decently.

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However, at this current price, there is still too much enthusiasm going on about the recent price hike and Bandersnatch. Netflix would be a buy a couple years down the road – if and when ROC continues to steadily rise and if irrational “tech” or competition fears arise enough to fan down much of the fever-pitch optimism that’s been happening of late.

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