First Identify It Then Don’t Lose Sight Of What Drive’s A Company’s Success
In our over two decades of investing there is one Warren Buffet quote that sticks with us: “Investing is simple… it’s just not easy.” We believe this to be true across many aspects of investing but most notably in investment selection. The goal of investing is the same for every investor out there… make money! Whatever you invest in, ultimately you want to make money. It’s the capitalist way!
If it is crystal clear this is the goal of the investor, it should be just as obvious you want to invest in profitable companies. For us, crazy as it sounds, we require our companies we invest in… to make money. We realize that ultimately if a company does not have earnings, it will one day cease to exist as a company! Not good for anyone.
Taking this a step further, when you invest in a company, there has to be a reason. It is at this point, investing loses its “simples” for many people. Whether it’s a new competitor, a shift in service delivery methods, or a new law to deal with, these changes to a particular industry blur an individual’s investment thesis. Many times, causing them to error in their decision making (i.e., sell too early, buy too late). In our technology driven society, we see this day in and day out.
A great example is found in the world of cord cutting. Leading this charge is the not so little Netflix. Customers love the product/service and investors are even more enamored with the stock (priced out of our valuation… if you were wondering). But what is it that drives this company’s success? The majority on Wall Street would tell you subscriber growth. True to a certain extent, but what keeps those eyeballs on Netflix? The company knows. Just look at where they spend billions upon billions of dollars… content!
Content is king and it’s what will drive their future success. Knowing this, but unwilling to overpay for the new kid on the block, we turned our attention to, believe it or not, a company that is priced nearly the same as Netflix even though it has a 60-year head start on content creation… Disney. Somehow, someway, Disney is hiding in plain sight. Actually, they are hiding behind the technology curtain. The majority of investors for some reason do not see what’s behind the front door of the Mouse House.
I won’t bore you with a laundry list of content that Disney has already produced (it is in the thousands of titles) or summarize the hottest content they have in Star Wars, Marvel, Fox (coming soon), and ESPN. In addition, they have 100 million fans that visit their theme parks on an annual basis, creating somewhat of a built-in audience for their upcoming Netflix like service(s).
Disney and Netflix most likely will both succeed in their cord cutting ventures. As investors, we will succeed by keeping it simple and not losing sight of what drives a company (once we identify it). In this case, it’s the old adage of Content is King. And if you don’t believe me, just ask Netflix. They are the ones spending $6 billion to $10 billion a year to create content, essentially proving the immense value of the existing Disney’s content library.