Ensemble Capital, an independently-owned investment firm, recently published its first-quarter Ensemble Fund commentary – a copy of which can be downloaded here. During the first quarter of 2020, the Ensemble Fund returned -18.6%, while the benchmark S&P 500 was down 19.6%.
In the said letter, Ensemble Capital highlighted a few stocks and Netflix Inc (NASDAQ:NFLX) is one of them. Netflix is a media-services provider and production company based in California. Year-to-date, NFLX stock gained 32.3% and on May 4th it had a closing price of $428.15. Its market cap is of $188.3 billion. Here is what Ensemble Capital said:
“Netflix, Inc (9.4% weight in portfolio): As the leading streaming video provider around the world with over 160 million paying subscribers, Netflix has seen a huge increase in engagement as a result of global lockdowns. A recent estimate we saw indicated 4 billion people have been ordered to restrict their movement. And what do people do when they stay home? Well, one thing they have been doing is watching a lot more Netflix. In fact, so much so that it’s put a strain on regional internet networks that have also seen a surge in capacity utilization from work at home and school at home activities such as video conferencing.
As a result, in parts of the world including Europe, Netflix has voluntarily reduced video streaming quality to free up bandwidth for other productive uses. This indicates strong user engagement, which is always the first level proxy in value creation in a service that is about consumer attention at its core. And the more valuable a service, the less likely the consumer is to drop the service for any reason and the higher the pricing power the service builds up.
So, from our reading, the value of Netflix has gone up tremendously for its users as they stay in and socialize less. In the meantime, with economic pressures on consumers globally, we think it’s reasonable to expect that Pay TV subscriptions like cable and satellite, could see accelerating declines, especially here in the US where that trend has already been in place. This would free up five to ten times more budget than cancelling a Netflix subscription of $13/month. Netflix is more likely to be near the bottom of costs to cut and near the top of services to add in our view.
Finally, Netflix announced it would spend $100 million to support out of work members of the creative community as a result of the impact of Coronavirus. This is a strong show of support for creative partners and potential partners on the production side of its business but also demonstrates the company’s financial strength and culture. It undoubtedly wins Netflix even stronger sway as the preferred partner for creators to help Netflix fill its growing global audience’s appetite for new content across categories.”
In Q4 2019, the number of bullish hedge fund positions on NFLX stock increased by about 11% from the previous quarter (see the chart here).
Disclosure: None. This article is originally published at Insider Monkey.
