πŸ‘‹ Hello from the home office.

Today’s Agenda

  • Netflix might lose its best shows in the next few years. Will people still subscribe?
  • Lululemon has defied the retail carnage. How?
  • Disney breaks out of a four-year base.

What are your favorite shows on Netflix?

I primarily watch reruns of The Office, Friends, and Parks and Rec. The WSJ reports those shows could be removed from Netflix when their contracts expire in 2021.

Two alarming facts for Netflix:

  • Three companies are launching competing streaming services:Β NBC Universal, AT&T, and Walt Disney. Their T.V. shows and movies make up 40% of the viewing minutes on Netflix.
  • Eight of the ten shows people spent the most time watching in 2018 were reruns and might not be on Netflix in a few years (see chart below).

Source: WSJ

This reminds me of an article I read about Under Armour a few years ago

From 2011-2015, Under Armour was a Wall Street darling. Kevin Plank (CEO) had a great story, athleisure wear was all the rage, and they had double-digit percentage revenue growth quarter after quarter. What wasn’t there to like?

One day I was browsing Bloomberg’s site and came across an article about the athleisure wear boom. The writer pointed out that prices on some of Under Armour’s most popular items were starting to sag.

Why was that?

Choice.

Other companies copied Under Armour’s products and charged lower prices. This fact had no effect on their stock price, until about a year later when growth slowed and investors realized that Under Armour’s products were easily replicable. Their stock fell from $52 to under $13 dollars in less than two years.

What does this have to do with Netflix?

I know Under Armour and Netflix are very different businesses, but competition and choice travel across sectors.

A recent survey was done by MoffetNathanson that asked why people subscribe to Netflix.

  • Kids programming
  • Content curation
  • T.V shows
  • The ability to binge
  • No ads

Netflix won by solving customer’s frustrations with linear T.V. (ads, specific viewing times). Now the old guard is trying to copy to the new guard. Is there anything on the list above that the incumbents won’t be able to do?

Will the experience be as good and as smooth as Netflix? Maybe not. But if they have the majority of content people want to watch, will people make that tradeoff? Will people still subscribe to Netflix if other platforms have the best content? We’ll see…

A narrowing moat?

A good question to ask at the end of the year is whether a company’s moat got wider or smaller. Netflix wins by keeping people on their platform, and a big reason why people stay on a platform, especially a content-based one, is the content itself. Would you stay on Facebook or Instagram if the people you cared about left and started posting their pictures to another platform? Of course not.

I’m not saying this spells doom for Netflix. I’m sure they believe they can make up for the lost content with original shows of their own. But it should make us think about their moat β€” if you believe they have one β€” and whether or not these actions will make their moat wider or smaller.

The point of this story is to remind us that competition, choice, where people’s attention is, matters. Under Armour’s investors ignored those realities for a while; until it came back to bite them. We don’t want to make the same mistakes they did and be caught flat-footed. So if you have healthy profits in Netflix, maybe consider lightening up a bitπŸ˜‰

Where’s their stock at?

Click to enlarge

Despite what I said above, we let price dictate our actions. Opinions are just that, opinions. The market doesn’t care about mine or anyone else’s.

Currently, the stock has sketched out a range between $240 and $375. At current prices, we don’t believe the reward to risk favors new positions but we would get interested closer to $240.

Compared to the other FAANG stocks

Outside of Facebook, Netflix has the best performance YTD (39.31%).


A good case study in how to succeed in retail: Lululemon ($LULU)

With all the carnage in the retail space over the past few years β€” Toy “R” Us (bankrupt), and a swath of retailers closing stores, Gap, Claire’s, Foot Locker, etc. β€” I thought we should take a brief look at Lululemon and try to figure out what’s made them successful. And in turn, use their formula for success when judging other companies in the retail space.

Here are a few reasons their CEO laid out in a recent article:

  • They won’t budge on price. They believe their products are superior to many copycats. They have a patent on “Luon.” The material that makes their pants feel soft.
  • They own their distribution channel. Unlike many of their competitors, you can’t find their products in big-box retailers. They only sell through their website and their 440+ stores in the U.S.
  • They have tremendous brand loyalty.

These facts bear out in their financials. They have superior gross margins and return on equity than both Nike and Under Armour.

Gross margin:

  • Lululemon: 48%-55% over 5 years.
  • Nike: 43%-46% over 5 years.
  • Under Armour: 45%-49% over 5 years.

Return on equity, most recent FY:

  • Lululemon: 31.8%
  • Nike: 17.4%
  • Under Armour: (2.3%)

By Lululemon not making their products available for wholesale, they are limiting a channel for revenue growth. However, by only selling through their owned properties, they can control the customer experience and have quicker feedback loops.

Under Armour distributes their products wholesale, has almost twice the revenue of Lululemon, and is worth half as much (Under Armour’s mrkt. cap is $10 billion to Lululemon’s $22 billion).

They are leveraging their brand loyalty and expanding into other products

With a customer base willing to shell out $100 dollars for yoga pants, it makes sense to sell them more high margin products and grab a bigger share of their wallet. Right?

Later in June, they are rolling out their own line of shampoo and deodorant. In addition, they are developing their own sneaker.

Will this work? Who knows, but it makes sense. Nike started out in shoes and expanded into adjacent categories like clothing.

But their stock isn’t exactly a bargain

Their stock has been gangbusters since breaking out of their range in early 2018. We would look to be buyers on a BIG DIP.


Disney breaks out of a four-year base

When the facts finally came out about Disney+, investors pushed their stock out of the $90-$120 range it has been trading in since 2015. We call these breakouts and the test of whether or not this is “for real” will be if the stock can hold the $120ish breakout level on a retest. If it does hold that level, we would add Disney to our buy list.

They are looking to between 60-90 million worldwide subscribers within the next five years. That’s still well-under Netflix’s 160 million plus worldwide subscribers, but it’s a start.

Disney is already a top fifty company in the U.S. ($250 billion mrkt. cap). Netflix’s market cap is $162 billion. If Disney+ adds 1/3 of Netflix’s value to Disney’s market cap, that would put Disney’s market cap north of $300 billion. They would be close to a top ten company in the U.S.

The point is, we aren’t going to wait and see if Disney+ is a success or failure. By the time that is obvious, the price could much higher or much lower. If we get a chance to buy near $120, we might just take it…


Thanks for reading, and have a great day!

Caleb