In one sentence: After Netflix's Q2 2022 report, Phil and Danielle go through what the quarterly letter and analyst Q&A revealed (viewing share, rising free cash flow, falling content spend relative to amortization) and decide it belongs in the "risky business" bucket at a sensible size.
Key ideas
- Netflix publishes a quarterly letter, then takes live questions. Danielle likes that it covers non-GAAP figures and free cash flow; both dislike that it's unsigned. Phil adds that executive letters have become less honest over time, with Buffett's still the model. [03:00–08:00]
- Free cash flow is now a talking point. Management expects it to stay positive and grow. Danielle values hearing the term from management at all. [08:00–10:00]
- Viewing share. The letter showed Netflix at about 1,334 billion minutes viewed in the US against about 600 billion for Disney (with Hulu), Prime, and Apple combined, and more than any single US broadcast network. Nielsen data and company-chosen stats need salt; competitors don't break out streaming results. [10:00–14:00]
- Word-of-mouth metric. Netflix compared Twitter volume for Stranger Things 4 against rival releases, showing cultural pull. [14:00–16:00]
- Personalisation lag. Danielle notes shared accounts blur the recommendations, a risk as the ad tier and sharing crackdown arrive. [17:00–20:00]
- Capex versus depreciation. Spend fell from about 1.6× depreciation to about 1.2×, so cash flow is rising. Evergreen shows that are written down to zero still draw viewers. Phil would treat much of that spend as growth, not maintenance. [20:00–22:30]
- Phil's disclaimer and Ackman. Phil says it looked on sale near $200 but he "could be wrong", and cites Bill Ackman buying near $400 as a name to watch, while noting how Ackman's Chipotle bet has fluctuated. [22:00–24:00]
- Content spend near $17B. Original programming is about $10B and growing while licensing shrinks because rivals bid more. Owned content builds long-term value while licensed content disappears. [24:00–26:30]
- Losing comfort shows. Seinfeld, Friends, and similar shows are leaving; Netflix lost about one million subscribers against two million projected. Churn is about half that of rivals. [27:00–30:00]
- Risky-business bucket. Phil would hold it within a 10–15% maximum for such names; it isn't as certain as Chipotle. Valuing it is harder, which makes it good practice. [30:00–31:30]
- Reading the words. Danielle uses Laura Rittenhouse's Investing Between the Lines idea: Reed Hastings led with the negative (losing one million instead of two), while the co-CEO and CFO spun and didn't mention debt. [31:30–32:30]
- Debt versus cash flow. Debt looks fine against earnings but scary against cash flow, which is what pays it down; fine as long as it isn't growing, though Phil calls that a conjecture. [32:30–33:30]
How it maps to RuleOne
- The site links filings for each stock, and the stock pages are where you compare capex against depreciation across years. The Rule #1 Toolbox is named as a place to read regulatory filings.
- Position sizing: a 10–15% cap on harder names maps to the portfolio view on /holdings/.
Buffett, Munger and Graham links
- Rittenhouse's Do the Right Thing and Investing Between the Lines are Buffett-endorsed readings on how to read executive language.
- Buffett's annual letter is the benchmark for candour; his 1986 letter on owner earnings underlies the maintenance versus growth split.
Words to know
- Churn: the share of subscribers who leave over a period.
- Evergreen content: older titles that keep drawing viewers.
- Non-GAAP: metrics a company defines itself.
Try this
Open a company's most recent shareholder letter or earnings release (links on /stock/TICKER/). Mark every sentence that leads with a negative and every one that spins. Which executive sounds more like Hastings?
Check yourself
- Why does a falling capex-to-depreciation ratio matter for Netflix?
Answer
It means spending is growing more slowly than write-offs, so free cash flow improves. - Why treat company-chosen statistics cautiously?
Answer
Companies publish the metrics that favour them, and third-party data such as Nielsen has had gaps, particularly in streaming. - What cap does Phil suggest for "risky business" names?
Answer
Around 10–15% of the portfolio, in total.
Short quotes
"Churn is the amount of people you lose as subscribers every year." (Danielle, ~29:30, auto-transcribed)