13 Stocks that could be the next Netflix or Dell
Is the MyWallSt team more impressed by Disney’s streaming service than it was with Apple’s? Do they think Uber might be a good investment based on its S1 filing? And how would they invest a $3,000 tax refund right now?
JAMES: On the last episode of Stock Club we talked about Apple TV Plus. Rory, you weren’t very impressed by Apple’s efforts. In the meantime, Disney has unveiled its own streaming service, inventively called Disney Plus. Are you more impressed by Disney’s effort, Rory?
RORY: Well, I think everyone is. When I watched the Disney Plus presentation, all I could think was to compare it to Apple’s and how much of a difference there was. Apple wielded all these celebrities, told us very little about the product in terms of what would be available when it launched; what price it would be; even when it was going to actually come out. It’s actually even kind of silly that they had an event; they could have done that with a ‘Coming Soon’ tweet, that would have been way more appropriate than having an entire event based around it.
Compare that to what Disney did. They had a few celebrities, the top actors
from the Marvel Universe, but they actually showed us the platform; you got to see how it would work. They had clips from upcoming hit movies on it, they told us how much would cost, what part of the catalogue would be included, how much they’re going to spend on it, how many subscribers they expected, when they expect to be profitable. They told us everything — even the fact that they might bundle it with ESPN Plus and Hulu — and all I could
imagine watching it was, there must be some Apple executives watching this going ‘We should have bought Disney.’
If you think about Disney Plus, it’s exactly what they want from Apple Plus. It’s a streaming service that’s family-friendly; it has premium content; it’s got a huge amount of intellectual property that’s proven time and time again to attract audiences. Can you imagine Apple unveiling its next phone two years down the line, and in order to show how great their new screen is, they’d be able to take a clip from the next Marvel film or the next Star Wars film or the next Avatar film — which Disney owns now — and show it live in the event. Isn’t that just so Apple? I’d say they’re probably kicking themselves now.
JAMES: Speaking of premium content — just so we’re clear of all the things that Disney will be adding to this — they have everything from the Disney brand itself, from Marvel, from Pixar, from Star Wars, from National Geographic; and they’ll have all the programs they also got from the Fox acquisition too. 30 seasons of ‘The Simpsons’ will be on Disney Plus straight
away; there are other things like classic movies like ‘The Sound of Music’ and ‘Malcolm in the Middle’ as well.
RORY: They’ve just got a huge amount of stuff. Even the day one stuff they’re releasing is already enough for me to think it’s a no-brainer for most households in America. $7 a month? You’d pay twice that, easily; especially if you have kids, because the problem Netflix has is that they have to keep generating new content over and over and over again, and they’ve seen
a problem where people actually subscribe to Netflix, watch what they want and then cancel the subscription until the next season of something that they want comes out.
Disney doesn’t have that problem because kids will watch the same thing over and over and over and over again, and they have all that content right away available. When Disney said they’re only going to spend two billion dollars a year in content in content generation in the next years, they don’t have to spend that much; they’re spending billions on their big blockbuster movies which will obviously go down into the services to become available. But I think it’s just a no-brainer, and I doubt that $7 per month fee could remain that way for long.
JAMES: You mentioned Netflix there — the $7 a month, it’s 45% cheaper than Netflix’s standard price — Emmet, as a Netflix shareholder, would you be worried about this or will it fit with households as part of a Netflix subscription?
EMMET: I think they’re very complementary products. Time will prove if people want one or the other. I think they complement each other very well, for the reasons that Rory explained; my children would happily consume Disney content non-stop, and Netflix, you’ve to dig a little deeper — I think their content certainly on this side of the Atlantic is a little more
orientated for people at our age — and the way I see it going is that houses will stack up a couple of subscriptions, and for those homes that haven’t yet cut the cord, it’s gone. It’s really now down to a couple of subscription services.
JAMES: That’ll eventually add up to the price of cable.
RORY: You’d hope not; even if it does, you’re getting much better content.
Do you think you could just add the valuation of Netflix onto Disney? If they end up getting nineteen million subscribers in the next few years, Netflix is valued at $150 billion. Another billion onto Disney’s valuation?
EMMET: Not sure if valuation math works like that, but perhaps.
RORY: Imagine they have 100 million subscribers and they up the price to what Netflix is charging; that’s an extra 10 billion a year in revenue, that’s a huge addition to the business.
JAMES: Investors were definitely happy at Disney’s announcement; the stock jumped at the time of recording, now it’s up more than 13% since the announcement. Disney shares had been in the doldrums the last four years, so it was nice to see Disney get a bit of a boost like that.
EMMET: It was amazing; a company valued at about a quarter of a trillion dollars, to jump 12% is unbelievable. I could not believe the effect that this new Disney Plus had on the valuation of a business. And you’re right, Rory, we might see that over the years as they land grab around the world that they’ve got a whole new catalyst, that at this moment in time might even make Disney look good value today.
RORY: Well, I think the thing about Disney as well is, it’s not about the money generated by movies; never has been. It’s all about getting people into that ecosystem where the kids love the characters, they love the films; then they want to go to Disney World, they want to go on the cruises, buy the games, they’re going to buy the toys. It’s a whole distribution pipeline of contents; the fact that they’re exposing more people to this in a cheap way is always going to be good for the business.
EMMET: And as a parent, you can subscribe to Disney Plus, and you can safely say to your kids, ‘Watch whatever you want’, which is great. I know as a parent with Netflix or with alternatives, even despite parental controls you still have a caution that there are shows that you’d prefer they didn’t see.
JAMES: Moving on then — and I think this podcast is fast becoming just a discussion about IPOs — last week Uber released their S-1 in preparation of their IPO, and this is probably one of the most anticipated IPOs of the year.
Rory, what is the S-1 for anyone who doesn’t know?
RORY: The S-1 is the very first offering document that a company puts forward; the first version of it is a bit loose on what amount of shares they’re offering, how much they’re going to be offering them; but it gives you the first full audited copy of their financials. It gives you a good breakdown; it’s like their first annual report, really, and lets public investors in on
what’s going on in the business.
JAMES: So they can see their health; how are Uber looking?
RORY: This is a very tough one to judge. It’s a giant document — a couple of hundred pages. Some notes — the CEO wrote ladder as they usually do talking about it; and this was one quote that I grabbed, which I thought was important. He said ‘‘When I joined Uber as CEO, many people asked me why I would leave the stability of my previous job for one that was anything but. My answer was simple: Uber is a once-in-a-generation company, and the opportunity ahead is enormous.’’
I think I agree with him on that.
JAMES: Well, it is. It's redefined the whole way we think about transport in a lot of ways.
RORY: Completely; we talked about this a while ago in terms of what IPOs we were most excited about. Emmet, you said Airbnb; and I was going to agree on that, but Uber was definitely my second one. I really do think they are the most disruptive company in the world at the moment; now in terms of how the business is going, it’s not that great. They lost $3.3 billion in operations last year — that’s excluding the money that they made from selling
parts of their South East Asia business and Russia business.
The metric in there which I thought was a bit fuzzy is their monthly active user number, which they have at the moment at 91 million. Which is a really annoying metric, because they talk about it all the time. They use it as a judge of how well they’re performing, but they have combined their core ride-
hailing business with their food delivery business in that number.
JAMES: Uber Eats, yeah.
RORY: Which makes that metric useless, because if you’re going to pay for a 5-mile journey— you’re going to pay for someone to take you from point A to point B — you’re going to pay an awful lot more than if you’re going to get someone to pick you up some food five miles away and drop it to you. That metric is wacky, and I don’t know why they decided to combine them like that.
JAMES: So they’re not easily comparable; a taxi ride isn’t the same as a delivery charge.
RORY: For a ten dollar taxi ride, you’re going to pay a two dollar delivery charge; they’re just totally different numbers, totally different businesses.
Some other interesting notes: the growth has definitely slowed. They had doubled the revenues last year, it’s up about 40% this year; obviously, the law of big numbers is coming into effect there, but they’ve also lost market share. According to Second Measure Incorporated which analyses credit card transactions, Uber had 78% market share two years ago; that’s down to 67% at the moment.
It’s one of those things with new IPOs; you always have to be wondering, why are they going public now? What is the purpose of them going public now? And a lot of the times — well, maybe that’s a bit unfair — but sometimes it’s because the early investors look at the business, they look how the business model’s going right now, and they see the end of the growth story; and that could be what’s happening here.
JAMES: So it’s putting it public, to get that little bit of extra cash injection.
RORY: Well, to get out. They want a liquidity event; look at what happened with Blue Apron. Blue Apron, in particular, was a disaster, clearly saw the business model was failing and decided to get out before that happened. Uber’s a weird one; you could say growth is slowing — the rideshare business has basically been flat for the last few quarters — but at the same time as they point out in the S-1, they’ve only penetrated 1% of the market as they see it.
JAMES: That was some of the recent news stories from the past two weeks. Moving on, we usually do our ‘Company We Never Talk About’ segment here, but as many of our American listeners know, Monday was tax deadline day in the US.
Here in MyWallSt, we’ve been doing a bit of research on the topic over the past few days; and in particular tax refunds, which I’m sure is everyone’s favourite part of tax season. According to the IRS, the average tax refund for a US citizen has been roughly $3,000 per year for the past ten years. In an article you can read exclusively in the MyWallSt app right now, we’ve calculated how much you would have made if you’d simply invested that sum into Apple, Amazon and Netflix over the past ten years.
But instead of the usual segment here; Emmet, Rory, I want to ask you guys if you’d got $3,000 as a tax refund right now, how would you be spending it? Emmet?
EMMET: Well, simply I’d be investing it, James; predictable answer number one.
JAMES: I didn’t tell you to say that.
EMMET: There’s a sequence in which someone should use a windfall like that; and very first, I think, most financial advisors would advise us to retire short-term, high-interest debt. So if I came into three thousand bucks — and I had some credit card debt sitting out there — the first thing I do would be to pay that down.
Let me go on two routes on my answer. The first is if I was a brand-new investor and had three thousand dollars, I’d probably take that money and
divide it equally amongst six companies. Now I know we have a question coming at us from one of our listeners about “What’s the next Netflix” — and I’m going to attempt to answer that with lots of caveats and Ts&Cs; and I think when we go there I’ll describe some of those companies — but the first thing I’d do is I’d take that three thousand bucks and I’d personally put five hundred and six different companies. That’s if I was a brand-new investor; if I was a
little more mature and I had an existing portfolio, I would do what I’ve done for the last 20 years which is add some cash to my favourites and maybe open one or two new positions.
RORY: I’m going to buy myself something first; I’m going to buy myself a new phone, my current phone is literally on its last legs. I’d buy myself a new phone — nice, expensive new Apple iPhone.
JAMES: How much left?
RORY: Two grand left. I’d open up a new position in a company that I really like — which at the moment, I’m going to say, is Eventbrite — and I’d add to one of my favourites, which at the moment is Veeva Systems.
JAMES: Veeva Systems, is there a reason why you’d now?
RORY: Why would I add now? Well, reinvest money in your favourite companies is always a good plan to grow your personal life.
JAMES: Sounds good; apart from our tax refund article in the MyWallSt app, there’s plenty of new stuff too. We added a new stock two weeks ago; Emmet, it’s one of your favourites.
EMMET: It is, and I invested in it.
JAMES: You can check that out in the app now. Rory, you’ve also added a new Expert Opinion Piece, which is about IPOs, I believe.
RORY: It’s a longer version of what I talked about there!
JAMES: You can check out all that stuff in the MyWallSt app right now. We’re moving onto one of the favourite sections of the podcast, which is ‘Jargon Busters’.
Every two weeks you, the listeners, send in questions that you’d like either Emmet Rory to bust. These can be questions about investing, or maybe even companies in particular.
The first question we have here comes in from one of our followers Brendan Rodgers on Twitter. He asks about renewable energy companies — Are there any companies that are taking advantage of the transfer to renewable energy, or is it even a segment worth diversifying into?
I suppose the obvious answer is Tesla at the moment, but outside of Tesla?
RORY: In terms of investing in renewable energy?
JAMES: Or even the segment or the industry in general.
EMMET: There’s a couple of industries in the world of investing that I think you should avoid unless you have some industry knowledge. There are people who work who get paid an awful lot of money in Goldman Sachs just to focus on the banking sector, just to focus on the pharmaceutical sector, and just to focus on the energy sector. They’re the three in particular off the top of my head; where unless you have some industry knowledge that no one else does, you’re probably going to find yourself lost at sea there.
It’s very hard to pinpoint when the next great renewable energy is going to come out; we looked for a while, there’s an ETF a few years ago called TAN, which was all the solar companies — five years ago, solar power was the big hot topic in terms of stock investing — if you look how that’s performed over the last few years, you can see that it’s not always as easy as going ‘There’s a trend; we should invest in that’.
JAMES: Maybe an industry that the ordinary investors should stay away from unless they’ve got some insight?
RORY: Yeah, because it’s not as straightforward as investing in software. There’s a huge amount of government regulation involved. You need to know a bit about commodities and commodity pricing and things like that, so unless you have an inside track on something, or unless you’re willing to spend an awful lot of time researching it — which, if that’s what you want to do, start doing that — but I wouldn’t go in blind thinking you can invest in it the same way you can invest in a retail company.
EMMET: I think it’s a perpetual question; I remember 25 years ago, looking for the next best green energy investment. It will always be there; and although the obvious answer is Tesla, I think it is also the best choice for an investor at the moment. I remember — I think around 1998 — buying shares in Ballard Power; I bought shares in solar, something or other. I had a whole stack of investments in — let’s call it The Green Agenda — and the complexities
that existed then are still at play today, as explained by Rory, and it’s a very diffuse area and very difficult to try and say ‘Yeah, that is the one to go for.’ And even the ETF’s; Rory and I spent some time looking for good, green and renewable ETFs, and without labouring it, none apparently jumped out at us.
JAMES: That’s very clear; thanks for the question, Brendan. The next question we have here is from Thomas Noonan — sent through email — and he asked what our thoughts are on Momo, a Chinese social media company.
EMMET: I had a look at them last night, and my best answer right now is ‘leave it with us.’ China is so complex, and the mores of dating in China and the way people interact romantically, I have to say it’s a little bit outside my circle of competence at the moment.
RORY: It’s outside my circle; even trying to value things, Facebook and Snapchat, and Twitter in the Western world, very hard. If you try and then transpose that to a totally different culture, a totally different way of doing things; it’s even if we looked into it, would there be value here?
EMMET: I noticed it was liked by David Gardner and the team over at the Motley Fool in the ‘Rule Breakers; service; and for me, that carries a lot of weight. Doesn’t necessarily mean it’s my opinion, but I’m telling that they recommended it from me, but feel that it’s an amber to green light. But personally, I don’t understand the business and Motley Fool, Rule Breakers.
I’m sure they do a very good job of analysing it.
RORY: There’s that company YY we had a look at?
EMMET: It’s kind of like speed-dating, but it’s for karaoke. You just hop on in there and— what’s that thing: is it Dating Roulette?
EMMET: Chatroulette, but with music.
JAMES: Well, if I have three thousand dollars, I know where to go.
EMMET: I’m sure YY does other things, but certainly if you’re going to be known for something, what better than Singroulette?
JAMES: Next question we have in is through email as well — and he was asking about Baozun.
Recently, they offered $225 million in senior convertible notes. He was wondering, what are senior convertible notes?
RORY: When a company wants to raise money, there are two ways they can go about it; they can raise debt or they can raise equity, and a senior convertible note is a mixture of both. The note part of it is that they’ve issued debt — someone’s given the money for debt, which they’ll pay a coupon on — the convertible part is that at a certain price point, the debtor can convert
his death to stocks; to equity. It’s a way for debtors to put some money into the business and potentially gain some upside if the company performs well.
Did that have anything to do with the 6% drop? Probably, because that was potential equity added; so the shareholder dilution was occurring there if the notes get converted.
JAMES: The last question we have here. On the podcast two weeks ago, Emmet, you talked about your investment in Dell; and how you used Dell as an archetype for your investment in Netflix 17 years later, which was a very successful investment for you. We have a section in the Wall Street app called Star Stocks; are these Star Stocks the next Dell or the next Netflix as you saw it and do you have any specific stocks you think might be the next Netflix?
RORY: Yeah, what’s the next Dell?
EMMET: Hewlett-Packard! [LAUGHS]
That story completely resonated with a huge number of our listeners, because turning $1,000 into $1.6 million in the space of 10 years is a super-normal event in most people’s financial lives; and it’s also a super-normal event in an investing life. It takes a huge amount of luck, it takes a great amount of judgment, and because of that story, the very question sent in, I had heard from other channels; that question came at me like an orchestra after the podcast, and I had to think a little bit about it before this podcast and write up a note on it, which I sent to some friends of MyWallSt.
The first thing I’d say is that back when I looked for the next Netflix — which was something 15 or 16 years ago — there was a harsh incubation ground for businesses that were in the valuation range of between $200–$500 million market cap and a lot of water’s gone under the bridge since then. A $200 million dollar company now is more a $2 billion company if you talk about it in equivalent terms. One of the things I said during the week to the people I
was speaking with is that $2 billion is the new $200 million, and what I mean by that is that looking for great investments that have a market cap of $200 million today is not actually prudent. I think that those businesses are too small to make any reliable call, and then the next thing I would say is — in looking for the next Dell or indeed the next Netflix, or the next great stock—
you can look, but you must diversify and buy as many businesses that you believe have a good chance as possible. Like any portfolio manager — whether it’s a venture capitalist or whether it’s Warren Buffett, or whether it’s Peter Lynch or whether it’s the three of us here— acknowledges that, with the best of judgment, a few of the businesses you invest in are going to turn out to be dogs and a few will turn out to match or slightly beat the market, and then
some will actually end up hopefully, being the next Netflix. That’s the portfolio approach that we advocate here and that we espouse, and that we aspire for every one of our members and customers to work towards.
The short answer is that we don’t put stock into MyWallSt without it being very well vetted by the three of us here — plus others downstairs — and we put
a lot of thought into each one; as our scoreboard shows, we don’t always get it right, but we get it right more often than not, which is great.
I have a short list of stocks that I personally like at the moment, and what I would say is, I wouldn’t dare say any of them are going to be the next Netflix, but what I would say is they have attributes that I believe have them positioned to grow beyond the returns of the market in the five to ten years ahead.
JAMES: And these are the attributes to talk about quite often, I imagine; founder-led companies, things like that.
EMMET: Exactly; customer evangelists, and the future relevant product. There’s a whole bunch of attributes; I’m pretty sure we have an explainer on our website.
JAMES: Well, in the Learn App, I think we go through it; it’s probably worth to note that because a company has some of these attributes, doesn’t necessarily make it a great investment leader. It’s just a good marker or a good indicator, look deeper. We might again come at that another time, but we have historically run six qualitative and six quantitative viewpoints on stocks; it doesn’t mean that every stock that looks exactly Dell on the 1st of
1990 today will actually turn out to be a great investment, that might not be the case. It’s not a mutually exclusive club that these companies all have these attributes and the next thing I’ll say before I dive in is that I might be wrong.
I have 13 companies here that I particularly like — and as I said to my friends during the week I have a shortlist of the 13 which I’ll also call out — but none may turn out to be even close to the next Netflix. It is truly a rare event to
invest in Dell; and when I happened across that Dell observation, if you like, in my early 20s, it was cherry picked. Of course, I looked for — I probably Googled, or whatever Google was at the time — the best investment of the last 10 years and my eyes popped out when I saw the returns that the market could actually bring an ordinary person like me. So the stocks that I believe look really good for a retail investor — that’s us today — and I’m not saying they’re cheap, but I think they’re wonderful businesses and are as follows; I own shares and all but two of them:
- The Trade Desk
- Huazhu Group
- Stitch Fix
There are 13 companies in which I have invested — with the exception of The Trade Desk regrettably, and Huazhu regrettably as well — but that’s 13. That’s still a lot to get your head and wallet around; and I am not advising, suggesting or trying to tip our listeners towards running out and getting their savings, smashing their piggy bank and distributing amongst those 13 businesses.
If I was to further have that list there are ones they prefer. I’m a big fan of Shopify. iRobot, Veeva, Arista, Atlassian and Tesla, and I have shares
in all six of those businesses. I’m not saying that one of those six — or indeed, thirteen before — stocks are the next Netflix. What I am saying is, I’m invested in the ones I called out; I will be sticking with them through thick and thin, and I happen to believe that one, two, three, four of them will do inordinately well. I don’t know which one, two, or three will do inordinately well.
I could keep going and tell you who my absolute favourite is, but that’s actually an exercise in futility. We sit down as a team every month, we pick our Stock of the Month and unbiasedly, we debate them. As you well know, James, we say ‘If we had only a thousand bucks on our lap now and there was a gun to our head to invest in only one company, which one would we choose?’ That process drives us with Stock Of The Month, and by me saying
what my absolute favourite is at the moment; it’s not useful.
JAMES: That was very helpful. I think it is important to see the Dells and Netflix's of the world as a good analogy and a good example, but we can obviously never use — history never repeats itself exactly and the next company that comes out, it’s hard to define it.
Moving on from those companies you like to our ‘Elevator Pitch’. At the minute in the MyWallSt app, there are 101 stock live. Out of these are 20 that are in the red since we’ve recommended them, which is a pretty good return, by all means.
My ‘Elevator Pitch’ for you guys this week is, ‘which of the stocks that are currently in the red in the MyWallSt app do you most of the minute and why?’
60 seconds; Emmet you talked for a long time, so Rory, I’ll let you go first.
RORY: There’s a couple of companies that are in the red at the moment — I’ve mentioned Eventbrite earlier — but the one I’m actually going to pick this time is called ShotSpotter.
ShotSpotter is a leader in gunshot detection technology allowing law enforcement to pinpoint where a gunshot comes from in a matter of seconds and can alert them to what kind of weapons are being used and if there are multiple shooters, which is vital for protecting first responders.
They launched it in a district in Chicago about two/three years ago, they’ve seen a 50% reduction in gun crime since then. Milwaukee last year has a 20% reduction in gun crimes since launching with the service.
It’s a very small company at the moments — $500 million company — and I think if you use your imagination, you can easily see how these businesses grow. Think of all the scenarios in which you want to protect people or
animals from the danger of gunfire; there’s a big opportunity in college campuses, major corporate campuses — school districts, sadly — and even national parks; the ones in Africa which are being plagued by poachers.
They’re creeping towards profitability; they expect to be profitable this year on revenues of about $45-$47 million, and that would put them at 12
times sales at the current valuation which for business with high retention, it seems like a good deal to me,
JAMES: Emmet, what company do you want to go with?
EMMET: As Rory said that, I realised we need to be a little more aligned because I also chose Shotspotter.
JAMES: That’s a good endorsement.
EMMET: It actually is; and I think some of our listeners will value the viewpoint that I was about to give because without any bias evidently I walked in — and Rory and I would usually at least talk on the way up the stairs to the studio — on this instance I’ve also chosen ShotSpotter, and I think it’s a wonderful company. I think it’s under-loved, unwatched; they have a monopoly in the area in which they operate, and they have added new colleges, new cities and dozens of new net square miles of coverage with their technology.
Just last quarter made about $9.2 million dollars. Why I like ShotSpotter as well is that they are unmatched by analysts on Wall Street; they have a monopolistic hold on a technology that, frankly, the world needs — and North America particularly needs — they are doing something, good they’re doing it well, their technology works.
All I can say is I wish someone picked something different, but I think it’s a nice endorsement to have two picks that are the same.
JAMES: I’m actually a shareholder in Shotspotter.
EMMET: So am I; are you, Rory?
RORY: No, but I think I will be soon.
EMMET: You found Shotspotter, actually.
JAMES: Two one-minute endorsements of Shotspotter there; pretty good.
That’s about it from this week’s Stock Club. Don’t forget as I mentioned already, there’s tons of exclusive new investing content in the MyWallSt app at the minute, including the New Stock, Expert Opinion Piece and the tax refund article I mentioned earlier. Please make sure to check all of that out now.
If you have anything that you would like us to discuss or some jargon for us
to bust on the next episode, please get in touch with us on Twitter at MyWallSt or email us at firstname.lastname@example.org.
If you enjoyed today’s episode, we’d appreciate a review on iTunes or whatever podcast player you listen to us on — helps us get to a wider audience — and from the three of us here today, see you in two weeks and thanks for listening.
MyWallSt operates a full disclosure policy. MyWallSt staff may hold long positions in some of the companies mentioned in this podcast.