Netflix (NFLX) is bumming me out. Not because it wasn't a good quarter. It was insanely good. But because it could have been had, could have been bought, for literally half the price several years ago, and whoever bought it would now be king.
I am no investment banker. I am no technologist. My job is to figure out what's the best way for companies to allocate capital to bring out the best value. In this case, I repeatedly harped on the idea that Action Alerts PLUS charity portfolio holding Apple (AAPL) pay $35, $45 or even $50 billion for Netflix. In each case, that would have been a 100% premium, because Netflix understood the worldwide disintermediation of the web and the artificial intelligence of predicting what viewers would like regionally better than any company on Earth.
I know that Reed Hastings and company would have been reluctant to sell, but very few companies can turn down that kind of offer. If you owned Netflix, then you would never again have to remind analysts that you had a growing service revenue stream, because all they would care about is this stream.
The delivery mechanism is known -- the internet. The programming is superior to everything out there. All that was necessary was a machine to provide the best video experience, and that was Apple. Of course, it didn't have to be Apple. Everyone who is scrambling to make content was a candidate. Every distributor.
But, it didn't matter. It didn't happen.
Now, there are two ways to view Netflix. One is to recognize that artificial intelligence defies the critics and the street and two, the ability to raise capital is directly dependent upon tangible results. Both of these concepts explain why this company sells at a valuation that's greater than $100 million.
Let's take them one at a time.
First, there is a moment on the call where the chief content officer, Ted Sarandos, just a brilliant guy, talks about the success of Bright, the urban fantasy cop movie with Will Smith, which did the equivalent of more than $100 million in box office on its first weekend. Todd Juenger, the thoughtful interlocutor, talked about how it was widely panned by critics. Sarandos, explaining why it was a success, states: "the way to reconcile it is to recognize that the critics are an important part of the artistic process" but, he continues "they are pretty disconnected from the commercial prospects of the film."
Instead, he suggests you want to focus on "Google Trends" or "Rotten Tomatoes" or the ratings on IMDB. Plus, the critics are American, and they are uniquely out of touch with what people like overseas, which becomes more and more important given that the U.S. is about five million households from being maxed out, although of course, watching Bright at a movie theatre would have cost about a third of what a full year of Netflix costs.
That's in keeping with how Sarandos judges the potential success of a production: 30% algorithm and 70% percent data base. Remember, they know far more about what you would like because, unlike cable, which seems to care more about pleasing millions but often has dozens of stations that are a huge drag to click around, Netflix only wants to please one person: you.
Anyway, you could argue that anyone could have figured this out. I come back and say, they didn't. Now, though, everyone is pursuing home-grown productions. The missing element: first-mover advantage.
We check Netflix first. I go to "Jim", I see everything I want. How did they know I wanted the Punisher? How did they know I wanted the new Black Mirror? The answer? It's their job, and as long as they are good at it, Wall Street will keep paying for it, until it just doesn't matter. It will be game over and they will spew capital.
It's just that when it happens, the stock will be worth $150 billion, three times what Apple or anyone else of the big guns could have purchased it for.
A Netflix acquisition would have been a gamechanger. But as so often is the case, others thought they could duplicate it.
They didn't understand that it was and always will be a personal service that relies on the kindness of strangers to deliver their product -- a remarkable model that just keeps defying expectations, exactly what makes for the fabulous stock that it is.
