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#9 - Did you also leave?

Stock Picking after Moat | Invest with Martin

People are leaving Netflix

Okay so first things first. I normally write about the larger movements here: China, Russia, Geopolitics, Inflation.... Big trends. But to be honest it's the same going on like last time. Lockdown in China, still war in Ukraine, and the markets are still nervous because the central banks of US (FED) and EU (ECB) are making the interest rates higher. So today I wanted to take the opportunity and write about Netflix. This Wednesday the Netflix stock dropped 35% in one day (!). That's unusual, even in these current markets. Here's their 6 month graph:

As you can see it went from $700 to $222 in just 6 months. That's a total drop of 68%. Ouch. The reason? Well in their own letter to the shareholders they literally write "...large number of household sharing accounts combined with competition, is creating revenue growth headwinds". Why that's true of course, they're not really showing us that they take it on themselves and take it serious (by the way just search "Netflix letter for shareholder". It works for all companies.). In my humble opinion there're 3 reasons people are leaving Netflix: 1. We're coming out of covid, and people are questioning if they really need 3 streaming subscriptions. How many do you have by now? :) 2. Netflix has been sleeping, and didn't update and innovate their app much the last years. 3. The competition is very strong and people want to check out other platforms with original content (Disney, Amazon, YouTube, etc). Netflix have no other interesting products. You can stream. That's it. If you own this stock, or want to invest now it's down, look at their numbers. Read the letter I linked to here. Go through the list we have been talking about in this newsletter. Do the research and ask yourself: "Is this still a company for the next 10 years?". It might very well be. It might not. But before you buy or sell, you should ask yourself the question. If you already bought it you should additionally ask yourself: "Why did I buy it in the first place, and is their business case still in tact?". If you know this, and you think the business is still okay - keep it or buy more. if you don't and you think they are not good anymore - get out and look for other stuff. I think the Netflix case shows just how important it is that we REALLY KNOW why we are buying individual stocks. The same happened to Facebook (Meta) last month. Small signs of a slowing business, and it got hammered. Let's say Tesla came out with a really bad quarter, or Elon Musk died, or their factories had to close down, or they can't ship copper to their production... Whatever it is. That stock (being extremely highly priced) would drop like a stone. So.... Do you know why you own your stocks? Do you REALLY KNOW? Or is it just because "Elon Musk is amazing and their cars are cool" or in the case of Netflix: "Well it's Netflix, they will be doing well, sure". It's dead important that you know this. And if you feel like you don't have the time to read and understand 10 years worth of financial data and shareholder letters, then move to passive investment (indexes and ETFs). You don't HAVE to own stocks. There's no shame in owning a large index and just follow the global stock market for 20 years. That's a perfect strategy that most people should follow. You will be way better off in the long term. So will your emotions and mental state. This was maybe a bit to the negative side, sorry about that, but these lessons are so important. It's your money. Spend them wisely. Let's move on to the numbers :)

Spotting a high performing company - Part 2

Last week we were looking at #3 on the list of 5 things we need to go through, when we want to invest in an individual company.

It still goes like this: It needs to be performing well and consistently, so we can predict it into the future.

We looked at their "growing revenue", "growing net income" and "high and growing profit margins". In other words, the company you're looking at needs to get better and better at making money, and do so consistently, so we can better predict it's future.

The next two things on the list is "High return on equity" and "High return on assets".

Who will volunteer?


Alright Microsoft, we will take you!

Return on Equity (ROE)

The "equity" part refers to our equity (our money), that we will have left after all the debt at Microsoft is paid out. For this reason it's known as the shareholder equity.

As shareholders we are of course interested in what return we have on our money. So we are smart and take the return (net income) and divide it with the shareholder equity.

Net income / shareholder equity = Your ROE.

For Microsoft we looked at their "Income Statement" last time to find their Net Income. That's $61.271 million or $61 billion for 2021.

We then go to their "Balance Sheet" and see in the bottom that the shareholder equity is €141.988 million or $141 billion.

Bip-bop said the calculator: 61 / 141 = 0,43 = 43%.

So. For all the money that Microsoft is making we are getting 43%, is the thinking process. That's great! Wonderful actually.

"Thank you Microsoft" some would say.

You can then go and compare it to their competitors or use a rule of thumb, saying that ROE needs to be over 15%.

Now to the Return on Assets (ROA)

This is just all Microsoft's assets, and the return that we are getting on it.

It's important, as we as investors want to know if the company in general is good at making money on their assets.

If you have a coffee shop, and you spend $100.000 on a new espresso machine (an asset) and it makes you $10.000, your ROA on the machine is 10% (simplified!).

So everything that Microsoft owns which is helping their business in 2021 is called "Total Assets" and it's on the Balance sheet. For 2021 that was $333.779 million or $333 billion.

Yeah I get it. They have a lot of stuff in that building.

Bip-bop said the calculator again: 61 / 333 = 0,18 = 18%.

The good rule of thumb here would be around 12-14%.

Of course you look at both ROE and ROA over the last 10 years, and see if they are high and hopefully also growing.

A business that keeps getting better at making money for us, is great :)

In conclusion

Just to sum up last week and this week for you, the company in question needs to do the following over 10 years:

  • Grow the revenue 5% every year

  • Grow their net income by 9%

  • Grow the profit margin

  • ROE above 15%

  • ROA above 12-14%

There is not that many companies that can do this over 10 years - but that's the whole point!

We want to find the incredible ones - otherwise why bother?

Next time we will be looking at #4 on the list "it needs to be better and better at making money for us".

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