Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
Four years ago I pulled out my credit card, filled out a quick form and became a member of Netflix. My wife and I were sold on the incredible library of kids content. For our two daughters, who were in preschool and kindergarden at the time, it was a gold mine of shows that interested them.
While it was more than worth the $8 per month for the kids content, we found it lacking when it came to adult-audience TV shows and movies. My wife and I often watched cable TV in the evening, and even paid for the occasional video on demand from our Rogers cable box.
Our opinion about Canadian Netflix seemed almost universal. Yet it would have been a huge mistake to avoid investing in the company's stock because of the limited video library. Investors who make decisions in such a manner are confining their thinking to the present situation rather than thinking far into the future.
Four years go by quickly, and in that time period, Netflix has turned into an incredible resource of video entertainment. It's so good that we have no cable subscription; we no longer rent movies and are swamped with great TV series that we have to choose between. I can only guess how incredible the content library will be in another four years.
Last week, Netflix opened its doors to customers in France, Germany, Austria, Switzerland, Belgium and Luxembourg. This is a major step forward in the company's global launch strategy, and the opportunity is gigantic. Netflix had 50 million customers as of last quarter. These new European markets have 63 million broadband-connected households.
According to Media Technology Monitor, a third of Canadian English-speaking homes subscribe to Netflix today. Considering the localization Netflix does in foreign markets (audio dubbing and subtitles), I think the ever-expanding library of original content could lead to these new markets growing faster than Canada. Also consider that Netflix hasn't even tapped into Eastern Europe or Asia yet.
The company's execution has been tremendous, and if it continues I believe investors will be well rewarded. Delivering exceptionally good TV and movie content over the Internet, while building a vast library of Netflix-exclusive content that people really want to watch, is the recipe to a fast-growing and high-margin business.
Netflix stock seems expensive, at first glance. The stock is hitting record highs, trades near $450 per share, which is over 60 times next year's consensus earnings estimates by analysts. That's the problem with first glances – they lead to quick decisions based on short-term thinking. What happens when Netflix captures hundreds of millions of customers around the world? That kind of scale will give them an unbeatable content-creation budget. They are on track to become a common discretionary spending expense for households around the world. I think that opportunity is worth a lot more than the current $27-billion market capitalization, so I expect the stock to remain firmly planted in my Strategy Lab growth portfolio.
Another Strategy Lab stock pick announced major news in the last two weeks. Apple launched its new iPhone models and showed off the Apple Watch, which is expected early next year. While I'm not a watch person, I think investors are at risk of making the same mistake with Apple as they did with Netflix – short-term thinking. The truth is we don't know what new applications software developers will dream up. However, I suspect that a wrist-mounted mini computer will unlock a great deal of convenience for its customers over the next four to five years. And without knowing what these conveniences will be, it's easy for casual observers to throw out bumper-sticker arguments about the uselessness of such product.
If I'm correct, then I feel confident Apple investors will be well rewarded. Apple shares trade at 14 times next year's earnings estimates, which I figure incorporate no upside from new product categories like the Apple Watch. I expect to hold onto my Apple shares for several more years.
Apple and Netflix are both impressive companies that have created products with long-term effects on how people spend their work and leisure time. Investors who haven't developed a long-term mindset have underestimated their potential – a situation which I still believe holds true today.
Disclosure: The author also owns shares in Netflix and Apple in his personal portfolio.
Chris Umiastowski