Edited by Brian Birnbaum and an update of my original Netflix deep dive.
Netflix investors left billions of $ on the table in 2022. This teaches us one of the most powerful lessons in the stock market: that focusing on price action over fundamentals is the best way to cheat yourself out of great returns.
Netflix added 14M net new subscribers in Q4 2024–the biggest quarterly addition in its history. The stock is up over 10% after earnings today, now 422% higher than when the market gave up on it in May 2022. The narrative that Netflix had lost its competitive edge led many investors to sell their shares for cheap, just when the company was poised to fundamentally outperform, teaching investors to focus on fundamentals rather than price action and/or narratives.
The narrative was so convincing that even Bill Ackman sold in May 2022, which in part explains my fascination with this particular market phenomenon. Intensifying my fascination is the fact that I also failed to see it in my first Netflix deep dive.
I see a similar yet converse pattern with Palantir today. With the stock up considerably, huge swaths of investors are jeering for it to crash, with little regard for the fundamentals.
As you can see in the graph below, Netflix’s cash from operations has trended up significantly since the 2022 local lows. What’s most fascinating about Netflix is that the company made no particular adjustment to its strategy. Netflix simply continued focusing on providing subscribers more entertainment per dollar spent. The move toward ad-based plans in 2022 was interpreted as weakness by the market, but it actually made replicating Netflix’s value proposal even harder.
On the surface, the numbers in 2022 pointed to Netflix losing its edge. However, extrapolating current numbers is usually not a good strategy, whether related to micro or macro. This is well evidenced by my Meta and Amazon deep dives, which indicated the market’s erroneous assessment due to cyclical dynamics. While cyclicality drives short- and medium-term results, both deep dives showcase how the main driver of financial outperformance long term is culture.
A company radically obsessed with delighting the end consumer, experimenting incessantly, and promoting an ambiance that tolerates failure is unlikely to fall into irrelevance. Conversely, a company that focuses on politics and discourages sharing new ideas will inevitably fail. A good understanding of culture and its various manifestations, as I teach in my Tech Stock Goldmine course, is therefore indispensable for long-term investors.
In 2022, Netflix’s culture was as crisp as ever. The then-touted slowdown in subscriber growth is, with only 2.5 years’ hindsight, barely visible in the chart below. Such phenomena explain one of my general maxims: that an investment’s minimum time horizon should be five years, with the ideal horizon being forever. Financials may devolve for a few years, but over the longer term, stock prices tend to track culture.
The importance of culture is depicted beautifully in the graph below, taken from this essay by Josh Tarasoff. Culture is the intangible force from which all other worthy aspects of a company emerge. Culture defines how people work together within the company and what people they admit or reject, which then tends to broadly define their collective fate as an organization. As has been the case with Palantir, Spotify, Amazon, Meta and other great companies that I have studied, culture is Netflix’s most reliable KPI when the numbers get blurry.
In my last write up I highlighted how Benjamin Graham’s 562X GEICO investment made him more money than his other investments combined. The recipe for his success was merely buying an extraordinary company at a fair price and holding it for decades. Strikingly, however, after 25 years of holding the company, it seems that Graham sold the stock too early. GEICO today is 20 times bigger than in 1996 alone, with the company continuing to compound way beyond Graham’s passing.
The main lesson from Graham’s investment mirrors that of Netflix investors in 2022: so long as a culture remains world-class, selling a winner is likely to evolve into a highly costly mistake.
According to management, Netflix’s record 14M new subscribers this quarter can’t be attributed solely to the Jake Paul fight and Christmas day football games. The majority of new subs came from Netflix’s broad content slate. When a management team cannot pinpoint the specific driver of growth, it’s often because the company’s cultural operating system is driving results in a way that even they can’t track.
Here’s what co-CEO Greg Peters said about this during the Q4 2024 earnings call:
Our estimates for subscriber adds driven by those titles combined represent a small minority of our total member acquisition in the quarter.
So, it's really the whole service that's working that delivered the upside that we saw this quarter. The vast majority of our net adds were driven by our broad slate in our portfolio globally.
Netflix has penetrated only 6% of the market in the countries they currently serve. The company has great potential upside. And now Netflix seems to be making progress with games, which, as I have explained in the past, accomplishes two things: lowers acquisition costs and increases the average revenue per user by increasing the surface area of Netflix’s IP (intellectual property).
Over the long term, the above promises to greatly improve Netflix’s unit economics, making the business more profitable and enabling them to reinvest more capital into producing great content. The move towards games is the path for Netflix to non-linearly increase the entertainment delivered to subscribers per dollar spent, departing from a more linear tendency operating with shows and movies alone.
What does this mean for the stock going forward? That it’s likely going much higher from here, likely amplifying the mistake made by those who sold in May 2022. It’s likely that, a decade or two from now, we will look back at Netflix’s trajectory and see its Q4 2024 earnings call as the start. In the earnings call, co-CEO Greg Peters shared some valuable insights on Netflix’s progress with games:
And we are just scratching the surface today in terms of what we can ultimately do in that space. But we already see how this approach not only extends the audience's engagement with the universe and a story, but also creates a synergy that reinforces both mediums, the interactive and the non-interactive side.
And so, to your question about impacts on the subscriber side, we already see positive impacts in acquisition and retention from our game playing members. Now, those effects are relatively small currently, but frankly so is our investment in games relative to our overall content budget. And we're going to stay disciplined about scaling that investment as we see continued scaling and member benefits.
Regarding Palantir, I believe the market is currently pricing in the company’s evolution from more siloed productization to universal platform. The valuation is generous, but in my view the implications of globalized digital twins go way beyond a $170B valuation long term. In my last Palantir post I explain how AIP enables Palantir to reduce months of coding and hundreds of employees to a few engineers and lines of code by embedding secure LLMs into all of a company’s data, as depicted below.
For example, Palantir’s AIP radically simplifies customer support by leveraging two embedded LLMs, eliminating the need for specialized software and multilingual staff working full time. The first LLM translates tickets between English and other languages, while the second processes and resolves them autonomously. This streamlined, AI-driven infrastructure reduces costs, enhances efficiency, and allows companies to focus on strategic priorities, leading to increased cash flows and a transformative approach to operations.
The end applications of this software are infinite, as is Netflix’s runway to carry on delivering more entertainment per dollar to more individuals worldwide. Studying Netflix deeply reinforces my view that selling companies with extraordinary cultures and infinite runways is usually a costly mistake.
Until next time!
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How do you measure or understand what is a good culture? Everyone talks about their great culture, but, as an investor is very difficult to see what is really happening inside the company and its culture.
Hi Antonio
Can you please explain the imapct of this AMD announcement on its competitiveness compared to others?
https://x.com/AMD/status/1882851449991737473?t=rgQGE4EipFfySXapokv1ZA&s=19