It’s that time of year again. The days are getting longer, the weather is getting a little warmer, the shops are starting to break out their Christmas gear (too soon!), and we have made some changes to the Spaceship Universe Portfolio.
For this quarter, there are two changes. I’ll introduce the new stocks next week. For today, let’s chat about what we’ve removed: Netflix and Blackmores.
Netflix
Netflix is one of the largest technology companies in the world, with a market cap of roughly US$117 billion. It’s also essentially a household name these days.
So, why oh why did we remove it, you’re probably wondering.
Recently we’ve seen a slew of new competitors enter the streaming space.
Disney has announced Disney+, which will bring content from Disney, Pixar, Marvel, Star Wars, National Geographic, and 20th Century Fox to the streaming masses. That could mean anything from the “Toy Story” franchise to “The Simpsons” will be available on demand.
Apple has announced Apple TV+, which will bring original content to streamers.
Then there’s WarnerMedia and NBC Universal, which are making moves in the US, and more locally, we’ve got Stan.
That’s a lot of big names and therefore a lot of competition. It doesn’t help that the competition are exercising their US distribution rights to popular titles such as “Friends” and “The Office,” and therefore revoking Netflix’s licenses of these titles.
Now, while we believe there’s always room for competition, we do have concerns.
To start with, these competitors have billions of dollars to spend on content, which will in turn increase Netflix’s production costs.
We also believe these lower-priced alternatives have reduced Netflix’s pricing power. Even worse, continually increasing prices, which will probably be necessary in order for Netflix to become profitable, might be less palatable for customers if they can go elsewhere for entertainment.
Speaking of going elsewhere, we worry that Netflix is susceptible to increased churn, which would mean more customers are bingeing and then opting out of their subscription plans to head to other streaming services.
Netflix is a growth stock. Most of its value is based on future expectations, therefore it’s highly sensitive to changes in pricing and subscribers. Even a slight change in pricing assumptions can lead to large long-term valuation adjustments. Competitors such as Disney+ have spooked us by being more aggressive than we expected when pricing their streaming services.
For now, Spaceship's investment team will keep an eye on streaming and competition.
Blackmores
Blackmores is one of Australia’s leading natural health companies; it produces herbal, vitamin, minerals, and nutritional supplements.
Unfortunately, the company has seen some major personnel turnover in recent times.
At least two key executives have departed the business in 2019, including CEO Richard Henfrey in late February. After Henfrey’s departure, Marcus Blackmore, who has been on the company’s board since 1973, said Blackmores needed to “overhaul strategy.”
Though the company announced a new CEO in July, the uncertainty did concern us.
The main reason for our interest in Blackmores was its business in China.
However, Blackmores has admitted changes in Chinese e-commerce laws, which rolled out at the beginning of the year, have caused declining sales in China. In August, Blackmores reported a 24 per cent fall in its full year net profit.
All things considered, we decided China was not working out and exited Blackmores.
Important! We’re sharing with you our thoughts on the companies in which Spaceship Voyager invests for your informational purposes only. We think it’s important (and interesting!) to let you know what’s happening with Spaceship Voyager’s investments. However, we are not making recommendations to buy or sell holdings in a specific company. Past performance isn’t a reliable indicator or guarantee of future performance.
The Spaceship Index Portfolio invests in Netflix at the time of writing.
