We added Netflix!

Our primary focus with every investment is to ensure it trades at a discount to our estimate of its intrinsic value. This is the fundamental premise behind value investing. Unfortunately, the market is prone to over optimism at times and deep pessimism at other times, and occasionally our companies will be part of this and may run ahead of themselves on expectations about future earnings that are too rosy. If this occurs, we will be forced to sell a great business even though we continue to like its outlook. However, it is essential that we maintain a disciplined and rational approach at all times.

Home entertainment: Streaming video on demand

For better or worse, the pandemic has changed the way we live, and the global response to COVID-19 has solidified a number of trends which we believe will intensify in the next five to ten years. One of these is subscriber video on demand, SVOD, commonly known as streaming. The home entertainment market has undergone significant disruption as broadband internet services take hold and cable companies cede share to subscription video on demand services. The shift has meaningfully accelerated during COVID lockdowns, and we see it consolidating over the next decade. It is the same trend benefitting our investment in The Walt Disney Company.

Both Disney and Netflix have market leading offerings which we believe will attract north of 300 million subscribers each over the next 5 years. Their combined spend on content will exceed US$35 billion in 2021, which ensures other aspirants will have a very hard time gaining market share as Disney’s and Netflix’s content cost per subscriber will be the lowest in the industry. More content begets more subscribers which begets more content and subscribers, a virtuous circle.

A critical metric in our assessment of possible investments is a company’s debt obligations and its cash flow generation. Netflix is now very close to being sustainably free cash flow positive, which means it will no longer have a need to raise external financing. In fact, the company has bonds maturing in Q1 which will be extinguished from cash on hand.

Together the two streaming companies currently account for around 15% of the Portfolio.

We divested several stocks in January including Apple, Starbucks, JP Morgan and Bank of America, while increasing our investments in other portfolio holdings and increasing our cash weighting to 15%. This provides an opportunity to capitalise on future share price volatility. We’re very excited about the outlook for our Portfolio companies in 2021 and beyond and will continue to monitor the companies we’ve sold in the last few months as they may become attractive investments at lower prices.