Lincoln Post: NFLX and Theaters, FCNCA Earnings
More Thoughts on NFLX and Theaters, Ted Sarandos comments for that business, CNK, MCS; also FCNCA earnings update, and the overemphasis on asset sensitivity and expense growth
Short Lincoln Post with a follow up on Netflix merger and their plans for theaters (What is a Lincoln Post? See here, but basically short notes from my investment journal that I share here; I plan to share more of these going forward if readers like the frequency. These might be updates on companies or a general investment thought).
Later this week, I’ll have a couple posts coming with some current investment ideas as well as some thoughts on the general market.
Theaters and Netflix Follow Up
Over the past two months, Hollywood has been panicky about the prospect of Netflix buying Warner Bros. The consensus is that if WB is for sale, Paramount (PSKY) would be the safer buyer that would more likely preserve theatrical production. The fear is that Netflix will eventually subsume WB and its theatrical business, choosing to release content via streaming instead of in theater.
This fear has hit CNK’s share price, down about 25% since Netflix announced the deal.
I’ve had a different view than the market here (see last post). If WB is going to sell to someone, I’d much rather have Netflix own it. They have far more resources than Paramount, which would be heavily indebted, and we know from other debt-ridden studios that it constrains movie production. Netflix would have no such problem.
I actually think it’s possible that Netflix actually increases, not decreases, WB movie output.
I see four major reasons why theatrical benefits Netflix:
They obviously make money from theatrical releases (at least helping recoup costs of production)
It’s free advertising for their streaming platform
It’s clearly been proven with lots of examples that theatrical release only enhances engagement on streaming
Hollywood relationships: this is the big one. A number of key producers won’t work with Netflix because they don’t do theaters. They want to keep Hollywood happy. They don’t want talent leaving when the merger closes
Netflix is a company I’ve followed closely for years, and like any great company (or great investor for that matter), they are adaptable. They aren’t stuck in the mud, or beholden to ideas they’ve held in the past. They are willing to adapt and change, and I’ve noticed that the company does this when they decide it is to their benefit. Netflix does not suffer from endowment bias (seeking evidence that confirms your prior views).
Here are some major Netflix pivots over the years:
They used to be fine with people sharing passwords, even encouraging it. They eventually cracked down on this.
They were adamant they wouldn’t sell ads (in 2020, Reed Hastings called this a poor customer experience). They pivoted to selling ads in 2022.
They were adamant they’d never do live sports. But on Christmas Day 2024, I watched the Chiefs play the Raiders on Netflix, and they’ve since had a slew of other live sports events. I expect live events on Netflix will significantly increase
They said “we build, we don’t buy” (meaning, they prefer not to buy other companies). They are now embarking on one of the larger acquisitions in media history
Netflix has a history of changing their mind when they decide it would benefit them to change. I think theatrical will be the next big pivot.
Last week, Ted Sarandos had some very interesting comments in a New York Times interview:
“When this deal closes, we will own a theatrical distribution engine that is phenomenal and produces billions of dollars of theatrical revenue that we don’t want to put at risk… I’m giving you a hard number. If we’re going to be in the theatrical business, and we are, we’re competitive people — we want to win. I want to win opening weekend. I want to win box office.”
People might say Ted will say whatever is needed to get a deal done, but I believe he’s genuine here.
Theater stocks look cheap, with double digit FCF yields. More on the stocks and their valuations in the last post. I don’t think industry attendance levels will return to pre-Covid highs, but I do think revenue and profits will surpass those levels as food and beverage has continued to grow (which carry 80% gross margins). And while the market doesn’t seem to expect this, I think the box office could still grow over the next year or two, which would add a fair amount of bottom line growth given the operating leverage in this business model. At 10x FCF for CNK and 7x FCF for MCS’s theater business alone (excluding the real estate assets), I like the value here. Both companies have been buying back shares and have plenty of dry powder to continue.
More of my clippings on Sarandos and Peters comments here. Full MCS post here.
FCNCA Quick Update