Netflix Stock Valuation: Is Netflix Undervalued Compared to YouTube?

During their recent episode of the Value Options Podcast, Travis and Carlisle discussed Netflix Stock Valuation: Is Netflix Undervalued Compared to YouTube? Here's an excerpt from the episode:

[Tim] Yeah. Yeah. And on the value options letter, there’s been some Netflix trades.

Toby, I remember years ago, I was on the value after hours podcast with you and Jake. And I remember talking about Netflix when it was trading at a pretty crazy valuation. And I remember saying, I think YouTube’s worth a lot more than Netflix.

And my reasoning behind it was just that the content is so much cheaper to produce. You have so much more variety. And then with Netflix, you have the same thing that occurred with a lot of the major networks where you get a lot of political or weird storylines that don’t really fit what people want to see necessarily.

It can almost be a little polarising. You don’t have the same variety. You don’t really have to sit down and watch those shows to enjoy them.

Whereas I know probably for you too, I’ll be working and then I’d rather just have something like sports or business talk or podcasts like ours on in the background, so you can pick up the good points and stuff like that, but you’re multitasking. So they’ve definitely not capitalised on some of the content they had. Stranger Things was such a great show.

Squid Games, they haven’t had that blockbuster hit recently. It’s been a few singles. You think a big blockbuster brings them back?

Is that what they need? No, I don’t think that’s it. I think that they need some more change.

I don’t know. The live programming I think is helpful in keeping people subscribed, but I think they need a few hits. They definitely need to get back to it.

I remember when I started watching Netflix, I liked a lot of their international stuff. They had really cool shows in Italy. I love this Italian mafia show called Gamora.

It’s my favourite show. That was so good. There was another one called Sabura.

They had some good German ones. And I haven’t seen as much of that stuff. I feel like that’s on other networks more so now.

And now it’s just kind of different, a lot of similar type stuff. They have a lot of documentaries that I feel like I’ve already seen, like Mike Tyson and stuff. I’ve already seen that stuff, The Last Dance.

But I think their valuation is pretty attractive, Toby. I think that at this price, I think they can get back on content. I don’t think that they’ve lost their edge there as far as their ability to put out good stuff.

They need a Taylor Sheridan type guy to just put out some bangers. That guy’s killed it for Paramount.

[Tobias] Yeah. When they crush it, they seem to be able to do a lot of political stuff that doesn’t seem to have a really big market behind it. But I wonder if when they get a little bit squeezed and they start becoming a little bit more commercial and start producing stuff that’s mass appeal, I suspect that’s what’s going to happen.
They’ll have to get a little bit more commercial in any sense with a little bit of a broader distribution. But I agree with you. I think that valuation is getting sort of interesting here.

I think free cash flow last time was like 4%, which is, that’s a little bit below the 10-year, but it’s still got pretty good growth in it. So it probably grows beyond that. And the last time it was at this level was like 2011, maybe.

And it’s clearly had a whole lot of growth since then. And that doesn’t have that much growth in front of it now. But I still think that it’s probably growing faster than GDP for a long period of time.

Pretty good cash flow yield here. Problems are fixable. And it’s a pretty high return business.

So it’s one of those things that I don’t have a position in it, but I think it’s an interesting stock to consider. But I agree with you, they’re big risk. And certainly the main competitor for my time is YouTube.

I would much rather watch YouTube because it can go so much narrower and deeper on your own interests rather than sort of the very broad slop factory that Netflix serves up.

[Tim] Yeah. I know. My youngest daughter is seven.
I mean, it’s easy to get her. I mean, she’ll love watching YouTube and she doesn’t go on TikTok yet, thankfully, but she doesn’t really like sitting down and just watching Netflix. And she likes some Disney stuff, but yeah, I mean, she loves the YouTube stuff and it’s probably not the best thing for her.

But I just think there’s so much variety. I’m on it all the time too in the background. I mean, I’ve never watched CNBC or Bloomberg anymore.

I feel like it’s very negative and it’s not a good energy source. And options are good on Netflix. So we’ve had some trades in the value options letter.

So the puts have pretty good premium because the stock has been quite volatile. And then that’s why I like that wheel strategy where if you get exercise, you can do covered calls on it. And so then on a stock like Netflix, which I don’t believe pays a dividend.

If it does, it’s almost nothing. You can protect some upside on that stock, but also collect the premium from the covered call.

[Tobias] So it’s a good- No dividend, but a little bit of a buyback going on, which I think is the more efficient way of doing it. I think that’s all for this week, Tim. Any final words?
[Tim] No. Let’s hope that the month finishes off strong and I hope everyone has a safe Halloween and enjoys themselves and looking forward to next week, Toby.
[Tobias] Good one. Thanks, guys. We’ll see you next week.

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