Kings Of Streaming Leave Competition For Dead

It is easy to forget what an incredible business Netflix is. The company began as a DVD rental business in 1997 and only started streaming in 2007. In 2013 it launched House of Cards, its first original programming. By 2017 Netflix became the largest entertainment provider in the world with more subscribers than all the cable TV channels in the US combined. It had 124m subscribers and was valued at $100bn.

Ten years later Netflix has over 300m subscribers and is valued at over $400bn. Its budget for original content was $17bn in 2024. Its ad-supported revenue is doubling annually from a low base. The ad-supported plan has become popular with 55pc of new sign-ups in Q4 2024 choosing that option.

I can barely watch anything on ITV because of the ads and was delighted when I switched to being an ad-free subscriber on Spotify. Given how inexpensive these services are, I expect many people will feel the same. In London, you get a month of streaming for half the price of one visit to the cinema. A restaurant meal might well pay a year’s subscription to Netflix, for which you receive access to programming which will soon cost $20bn a year.

The world’s population is 8.2bn so Netflix has achieved 3.65pc penetration. There are around 4.5bn smartphone users in the world. Even if we assume 1bn of those are in China, Netflix is well shy of 10pc penetration of its potential market as defined by smartphone users.

You may also wonder why the Chinese must be excluded from Netflix. It seems as absurd to me as it must do to many Chinese. It seems hard to believe but one day that may change. The tyrants in charge of China may eventually lose their grip, especially if Trump threatens to shut down international trade unless the Chinese open their borders.

I am no believer in tariffs but I agree with Trump that it is outrageous what the Chinese have been allowed to get away with; how dare they expect untrammelled access to Western markets while operating the most egregious protection themselves.

If China ever did open up to Netflix the shares would probably double overnight, given how much the company has learned about making appealing local programming.

Each time Netflix reports the analysts pore over the figures looking for signs of acceleration or slowdown. As long-term investors, we do not need to bother with this obsession with the minutiae. The big picture is that Netflix is an ever-changing, fabulous business with a huge untapped global opportunity.

The long-term chart with each candlestick representing a year shows the strength of the uptrend. It is a classic step pattern, up, sideways, up, sideways, up. The latest breakout looks to have a long way to go.

Spotify is Netflix for audio and, according to the guys at The Trade Desk, a company which sells ads on streaming platforms, audio is about to have its day in the sun.

The seventh macro vector that I want to talk about today are the trends happening in Audio. I want to highlight that many have wrongly defined the advertising TAM of audio to some sort of comparison to legacy radio. Because the biggest players in audio are global and because digital provides potential for far fewer and more relevant ads, I’m convinced if the biggest players move correctly, they can capture one of the biggest opportunities in advertising and media today— which is the delta between time spent in the audio channel and the amount of ad budgets heading to the channel.

Digital audio is at the early stages of its evolution. The channel is in a similar position to where CTV was a few years ago. Consumers in the US spend an average of 3 hours per day consuming digital audio, up significantly over the last 5 years, and advertisers are eager to capitalize on this emerging advertising channel. At the moment advertisers are looking for clear trusted signals to inform what they buy. “Trust
but verify” has become a mantra around the Open Internet. Just a few of weeks ago, media reported on our major, expanded partnership with Spotify. They will be deploying both UID2 and OpenPath, so that advertisers can find as much addressability and insight as possible for Spotify’s high value ad impressions. I don’t think there’s any company in the media universe that’s been more successful than Spotify at building a subscription model. In the audio world, Spotify gives us access to almost all of the world’s music for a low monthly subscription. In many ways, Spotify has been at the forefront of this
mass consumer shift to digital audio. I think they are in process of becoming well positioned to get incremental users due to a good ad experience and to get incremental ad budgets for the exact same reason. You only have to listen to their most recent earnings reports to understand how seriously they
are taking the ad-supported side of their business and building out their programmatic capabilities over the next several years. We are very excited to partner with them in this work and to help our advertiser clients make the most of this fast-growing channel where listeners are highly engaged and leaned-in.

Jeff Green, CEO, The Trade Desk, Q3 2024, 7 November 2024

I have published the above quote before about Spotify but it highlights their opportunity. As you know I think Spotify is an amazing company and CEO and co-founder, Daniel Ek, is one of the world’s great entrepreneurs.

The business is scaling rapidly.

What is also exciting is what is happening to profitability.

This is a function of a dramatic fall in costs as a percentage of revenue.

Higher profitability is leading to surging free cash flow.

The engagement on Spotify is incredible.

All the signs are that Spotify is at an inflexion point.

We had a strong quarter and closed out 2024 even better than we anticipated. This gives us plenty of runway and flexibility for years to come. It was our highest Q4 ever for MAU additions and our second highest of all time. We also had record high subscriber additions, but that’s not all.

We set quarterly record highs for revenue, gross margin, operating income, and free cash flow as we closed out our first full year of profitability. So what drove this growth? Well, in large part, it’s the result of countless improvements and tweaks we made over the past two years and continuous system of innovation that has brought us to where we are today.

In Q4, we enhanced our product in areas like video and audiobooks with many more innovations to come in the quarters ahead. And it’s really this ongoing commitment to incremental progress that ultimately adds up to something massive over the long-term, even if the exact timing sometimes is hard to predict.

Daniel Ek, CEO, Spotify, Q4 2024, 4 February 2025

Share Recommendations (5 February 2025)

Netflix NFLX

Spotify SPOT

Palantir PLTR

I have added Palantir to the share recommendations list because I have realised something extremely bullish about what is happening. The investment community is sceptical of Palantir.

In spite of his optimism, Radke [an analyst] still has reservations. “While metrics point to inflecting AI growth, we could get more constructive if PLTR showed sustainable levels of upside revisions,” he wrote. “There was likely some non-repeatable budget flush in Q4 and now hitting softer Q1 seasonality.”

The analyst also noted that the firm’s updated regression implies an enterprise value-to-sales multiple of 56 times for 2026. Historically, the return profile for software companies trading at above 50 times forward EV/sales “hasn’t been good,” Radke said.

Most analysts maintain a neutral stance on shares of Palantir. Of 23 analysts surveyed by FactSet, five rate the stock at Buy or the equivalent, five rate it at Sell, and 13 rate it at Hold.

Dow Jones Newswires, 5 February 2025

I remember two other stocks where analysts were similarly sceptical in the early days when their shares began to explode higher. The two shares were Nvidia and Tesla.