The theme this week on the Retirement Quick Tips Podcast is: Sure Fire Bets That Fizzled Out

Today, I’m talking about what happened to Netflix, the game-changing company that single handedly destroyed the video rental business. 

When I was a finance major in college, I took a valuation course that taught us how to value publicly traded companies using a discounted cash flow model. This methodology is what the professional analysts use when projecting target prices on stocks, and if you have the know-how and resources to value a company yourself, it can be a fun and rewarding exercise as an investor. 

The final project in this class which made up about 60% of the final grade, was to complete a comprehensive valuation for a company of your choosing. 

Netflix was the company of my choosing when I took this class and completed this valuation project back in 2006. Netflix was gaining steam in the DVD rental business and had some significant advantages over Blockbuster in that it had no expensive retail locations to operate, and it wasn’t charging customers late fees.

I chose Netflix for my project, because it was a very simple business to analyze and value. They weren’t streaming content for subscribers and they weren’t creating their own content - you just ordered DVDs by mail and that was pretty much all there was to the Netflix business model. Call me lazy or smart, it was a good choice for my valuation project because it was a straightforward business. 

And of course, we all know what happened to Blockbuster and every other video rental retail location. Over the course of the next few years, they were all gone. Interestingly enough, in Bend Oregon - about 3 hours from where I live, is the last standing Blockbuster store. If you visit Bend, you can still rent a new release and pay late fees if you don’t bring it back on time. 

When I completed the valuation for Netflix, it was clear based on my valuation and research that Netflix was way undervalued at that time. Basically, the stock was much cheaper than it should have been, and I would have been smart to scrape together as much cash as I could find to buy some shares. However, being a 21-year-old college student who’s priority was having enough money for drinks and wings at the Cheerful Tortoise bar on Thirsty Thursdays, I never seemed to be able to buy any of the stock. 

To this day, I regret not buying the stock after my amateur assessment pointed to its status as a clear winner. Had I bought around the time I completed my report and held on until today, I would have made a return of over 8,000%. 

But the industry has changed dramatically since Netflix destroyed Blockbuster. They now compete in the streaming space against a lot of other companies, like Hulu, Disney+ and Amazon Prime. In the summer of 2022, Netflix had lost 1 million subscribers in the 3 months ending in June of this year. And they’re struggling to continue to grow amid so much competition. In short, they’re losing market share in an industry where competition is increasing, and they’re having to fight hard to stay on top. 

So what’s the lesson here? Companies don’t maintain their top spot forever. Netflix has been top dog of the content streaming space for years, but it faces a lot of competition and is unlikely to maintain its dominant market position in the number 1 spot. The stars of companies rise and fall, and just as Blockbuster was a dominant player before Netflix came along, and while I don’t think Netflix is going anywhere anytime soon, it could very likely meet the same demise someday as it loses market share to an ever-crowded market. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast.  

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