Uncategorized – Page 2

Netflix has surpassed Disney in market cap.

What are the concerns for investors? especially vs. an investment in Netflix

1) asset heavy (theme park) model

Theme park risk is exposed during covid. Plus, as theme parks are located across the world, different jurisdictions can complicate the operation.

And it’s trying to expand. In the next 10 years, Disney plan to double global capex to $60bn. Much of that is probably due to the land bank – “In fact, Disney Parks has over 1,000 acres of land for possible future development to expand theme park space across its existing sites”.

It’s a truly unique experience, but also considered as a riskier one vs. Netflix’s spending on content.

And it requires consumer spending on theme parks to double? This might be possible if one family went to Disney Park once in the past decades, and is going to visit twice in the next decade; but could be a burden if one expects visits per year to double for a family.

2) caught up in US-China tension?

Netflix doesn’t directly operate in China, and its financial performance doesn’t depend on China. This can be a relief for investors, who usually don’t want to be caught up in geopolitical tensions.

3) unprofitable streaming?

It takes time to be profitable in streaming, with a stable subscriber basis and a good pricing strategy. It’s actually not that easy.

For CY2023q3, Disney streaming revenue is ~59% of Netflix. Disney had 199mn subscriptions across offerings, while Netflix had 247mn during the same time period, or 80% in terms of number of subscriptions.

Disney’s core Disney+ paid subscriptions are at 112.6 million as of Sep 2023 and lost $420 million in that quarter. Although loss has decreased, it take longer and a bigger scale to become a good income stream for Disney.

Comparing with Netflix, which got $16.64 / month from ~80mn paid membership in US & Canada, Disney got $7.5 / month for its 46.5mn US subscribers.

You can’t double the price overnight. Disney needs to increase its value delivered to consumers in streaming.

Disney announced price hike back in Aug, effective Dec 2023 – from $10.99 to $13.99 / month, or 27% hike for the non-ads plan in the US.

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New:

Source: https://www.flatpanelshd.com/news.php?subaction=showfull&id=1691641877

Old:

Source: https://thewaltdisneycompany.com/ad-supported-disney-subscription-tier-to-launch-in-the-u-s-on-december-8/

Netflix: there is a lot to like

Besides a single quarterly earnings beat, there are many things investor like. Netflix can appeal to both defensive and offensive investors.

1/ a stable positive FCF

For several quarters in a row, Netflix has delivered $1.5bn+ FCF/qtr, and expects 2024 FCF to be ~$6bn. Positive FCF is crucially important in today’s high-interest rate environment.

Btw, Netflix doesn’t need massive capex and doesn’t worry about utilization etc. However, Netflix does need to spend on contents.

This FCF is built upon a $17bn cash spend budget on content for 2024.

If not for the $1B in delayed spending due to the WGA and SAG-AFTRA strikes, 2024 FCF should be $7bn.

$7bn with 4-5% required fcf yield implies a $140-175bn market cap, which was where Netflix was trading at in 2023.

2/ growing TAM

Investors like an expanding TAM – like Amazon’s flying wheel model.

Internationalization was the first step: 2012 Netflix had <5mn paid subscriptions (incl. Canada).

By the end of 2023 (in 11 years), Netflix has ~180mn paid members outside of US & Canada – a more than 36-fold increase.

Now, Netflix has pretty interesting upside in non-video streaming businesses: such as ads and gaming.

“It’s a $600B+ opportunity revenue market across pay TV, film, games and
branded advertising — and today Netflix accounts for only roughly 5% of that addressable market”

2023q4 Netflix letter to shareholders

3/ Shareholder return

2023Q1 buyback: $400mn

2023Q2 buyback: $645mn

2023Q3 buyback: $2.5bn

2023Q4 buyback: $2.5bn

Its capital allocation strategy:

The first priority for our cash is to reinvest in our core business
and to fund new opportunities like gaming and ads, followed by selective acquisitions;

Target maintaining minimum cash equivalent to roughly two months of revenue (e.g., about $5.4B based on Q1 revenue).

After meeting those needs, we anticipate returning cash to stockholders through share repurchases.

China’s GDP growth?

2023 China’ official GDP figure is growth 5.2% yoy, as reported today.

The caveat is that the growth is in RMB terms. However, due to RMB devaluation, GDP in USD terms is flat for 2 years.

2021 GDP in RMB: 114,923.7 bn

2023 GDP in RMB: 126,058.2 bn

2021 average FX: 1 USD = 6.4529 RMB

2023 average FX: 1 USD = 7.0742 RMB

2023 vs 2021 GDP in RMB terms grew by 9.7%, or 4.7% annually;

while RMB vs USD dropped by 9.6%, or 4.7% annually.

So GDP in USD terms is flattish for 2 years.

China’s birthrate 2023: record low

2023 China has 9.02 mn new born, a record low. Birth rate is 6.39‰ (per 1000 people).

In Japan, it is estimated to have 726,416 new borns in 2023, also a record low.

Strict covid control had negative impact on birth rate. And the remote working culture seems very different in Asia vs. say the US. There is almost no remote working in China. And I don’t think remote working in Japan is mainstream. Remote working seems to be very good to raise kids.

How did post-08 housing price perform in Manhattan?

How did average price change?

Average price per sqft for 2 bedrooms dropped ~17% in 2009 and ~4% in 2010.

Overall average price per sqft looks slightly down / rather flattish in 2010 across all types.

Difference across areas is huge – certain areas can continue to drop over 10% in 2010.

Source: https://www.millersamuel.com/files/2011/10/MMR10.pdf

How was median income level?

Median household income level in New York County (Manhattan) in 2010 was $63,188, dropping 7.5%.

Median household income level in New York State in 2010 was $49,780, slightly dropping.

A 118 sqm 2-bedroom home (or 1,270 sqft), with average price per sqft of $1,097, is equivalent to 22x a median Manhattan family’s annual income in 2010, or 28x a median NY state family’s annual income in 2010.

Monthly median income from a Manhattan household can buy 4.8 sqft, or 0.446 sqm, at average 2-bedroom price.

Source: Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MHINY36061A052NCEN

Source: Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MEHOINUSNYA646N

Another source for median household income is here, from nyc.gov: https://www.nyc.gov/assets/planning/download/pdf/data-maps/nyc-population/acs/house_income_nyc_boro_06_10.pdf

How much money did electric vehicles companies burn (China Trio: Nio, Li, Xpev)

Employee counts at the end of 2020, 2021, 2022:

Nio total	7,763	15,204	26,763
Xpev total	5,084	13,978	15,829
Li total	4,181	11,901	19,396

Their R&D expenses combined is likely to be similar as Tesla’s R&D expenses in 2023, or ~$4bn.

CapEx (rmb, mn) in 1H 2022, 2H 2022, 1H 2023:

Nio	-3,463	-3,510	-5,039
XPEV	-2,383	-2,297	-1,429
Li	-2,010	-3,118	-2,569

Despite a macro downturn, Nio is spending more in capex.

Nio’s capex is now 26% of its revenue in 23H1; XPEV capex has come down a bit to 16% of revenue; Li Auto had the best ratio at 5.4% of revenue in 23H1.

The trio has spent 18bn rmb in capex from H2 2022 to H1 2023, or ~$2.5bn in usd.

To compare, Tesla has spent $7.8bn in capex during the same period; Rivian spent $1.1bn and Lucid spent $1bn.

While Tesla and Li Auto’s gross profits are higher than their capex number, the other 4 companies were burning their own cash.

Middle-east (CYVN, Abu Dhabi based) is backing Nio in 2023, providing ~$3bn net new funding to Nio.

EU (Volkswagen) is backing Xpev in 2023, providing ~$700mn financing to Xpev.