Patience takes the risk out of the equation.
Our next recommendation comes after a long look at this company from a distance.
Netflix is an entertainment conglomerate that started out as a local DVD sales and rentals company but later became famous for its rentals of DVDs by mail. The original Netflix monthly subscription allowed the customer to set up an account online, select the DVD they were interested in, and have it mailed out to them, one at a time. The subscriber then had an unlimited amount of time to time watch the movie and mail it back for the next DVD on their list, no late fees accrued. The popularity of this model soon gained tons of momentum and eventually helped to put Blockbuster and other brick and mortar movie rental companies out of business.
Let’s go over the reasons for our recommendation.
Not satisfied with the “deliver to home” of physical DVDs model, Netflix expanded into a growing area of service called “video on demand,” or streaming. Instead of being limited to ordering from a catalog of what was available and in stock – remember, you can only make so many copies of a DVD – and with the click of a remote control, millions of subscribers could watch the latest DVD release the day it became available on Netflix. The new business model made it easier for customers to receive their product instantly via Blu-ray, smart TV, smartphone, or tablet.
There are certain companies who, over time, manage to build what Warren Buffett likes to call a moat. A “moat” by definition is a deep, wide ditch surrounding a castle, or town, and is intended as a defense against attack. In the business sense, a moat for a company is one that manages to make itself an integral part of its consumers’ daily lives. Some of the companies that fit this category include IFTF recommendations Apple, Facebook, and Starbucks. They become a way of life. Netflix has a loyal, growing customer base. It started with less than 1000 subscribers in 1997 and today it has over 93 million paying subscribers. With cable TV becoming more expensive by the year, Netflix has provided a less expensive but quality alternative. It is likely that its popularity will continue to gain momentum as millennials and generation Z folks move away from traditional programming. Netflix has also grown its geographical footprint and is now available in over 40 countries with plans to expand.
Unlike its Blockbuster or Movie Time predecessors, Netflix has pushed the game farther than video distribution. In addition to providing movies on demand, Netflix provides shows which it produces or purchases exclusively via its subscription mode. Popular and well-received shows such as House of Cards and Orange Is the New Black have taken the general public by storm, and have expanded Netflix’s presence in the entertainment industry to new heights.
In conclusion, Netflix is a company that IFTF has been watching for a while. Based on the ease in which content is delivered, the loyal fan base, its cost vs tradition cable, and its successful expansion into content provider, we are comfortable with recommending Netflix in your portfolio today, for the long term. Netflix currently trades at $147 a share.