Why I Might Trim My Netflix Position This Week
Netflix is reporting earnings on Wednesday of this week, so what better time than now to re-evaluate where Netflix is and where it is going? I’ve written many times before about how Netflix (NFLX) has a special place in my heart for a number of reasons. It has been the best performer in the Freedom Portfolio (up 640% and beating the S&P 500 by 580%) and was one of my biggest winners early in my investing career (although it could’ve been a much bigger winner). Whenever I have sold parts of my position, I have almost always regretted it, to the point where I half-jokingly swear off ever selling Netflix shares again.
Which is why it’s tough to say that I’m thinking of trimming my Netflix position.
Nostalgia and emotional attachment is no reason to hold onto a stock. Investing is all about looking forward, not looking back and reminiscing about the past. Netflix is currently the only Enterprise level position in the Freedom Portfolio. Does my conviction in the company still match the size of the position?
Here are the four main reasons why my conviction in Netflix is waning a bit, in no particular order:
- The low hanging fruit might be picked – Netflix’s domestic growth has been slowing as it has started to reach a saturation point in the US. Luckily, international subscriber growth has picked up the slack, but how much longer can that continue? Many countries don’t have the infrastructure yet to support streaming video, and Netflix has run into some speed bumps when it comes to the two most populous countries. Speaking of which…
- India might be a tough nut to crack – One of the underrated aspects of Disney’s (DIS) purchase of Fox was the acquisition of Hotstar, a streaming video service in India. Hotstar gives Disney a huge head start over Netflix. India is a giant opportunity for Netflix, but it’s also a market where they have to play catch-up. Can they do it? How much will they have to spend on original content to compete?
- Content uncertainty – A lot of noise has been made lately about a lot of the content that Netflix is losing. Disney is pulling their content back for their own service and the Daredevil/Jessica Jones/Luke Cage/Iron Fist/Punisher shows have all been canceled. They’re also losing the rights to Friends and The Office, two of the most watched shows on Netflix. To their credit, Netflix has been preparing for this day for a long time by ramping up spending on their own content, but the jury is still out on how much losing those two shows will hurt their subscriber count.
- Decreased pricing power – Disney surprised a lot of people when they announced the pricing for their new Disney+ streaming service would start at $6.99 a month, which is significantly cheaper than the most common Netflix plan. While I don’t expect massive defections from Netflix when Disney+ launches, and do believe that Netflix can still achieve subscriber growth with a higher price point, I do think this hurts Netflix’s ability to raise prices in the future as long as Disney’s service remains significantly cheaper.
I should note that none of this means that I think Netflix is a terrible investment. I’m considering trimming my investment, not liquidating it completely. My conviction has waned, but not entirely gone away. I still like the company a great deal and think it will beat the market over the coming years. The question is if I’m still as convinced it has as much upside as some of the positions that are smaller than it. I’m not sure I do.
I’m not going to do anything before the earnings call, and I might not even do anything after the call. But unless I hear anything that piques my interest or causes me to alter my thesis, there’s a chance I might reduce my Netflix holding from an Enterprise level to a Serenity level.
And if I do, I guess we’ll see if Netflix can make me regret it again.
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