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At an Berkshire Hathaway annual shareholder meeting, Warren Buffett made the following observation about Apple and the way its customers think about its products:
Maybe I’ve used this example before, but if you talk to most people, if they have an iPhone and they have a second car, the second car costs them $30 or $35,000, and they were told that they never could have the iPhone again, or they could never have the second car again, they would give up the second car. But the second car cost them 20 times [more than the iPhone].
This reveals a lot about the way Buffett thinks about investing in businesses like Apple. And there’s another company that I think a lot of people feel the same way about.
Netflix
In the last 12 months, Netflix (NASDAQ:NFLX) has stopped reporting subscriber numbers in its quarterly updates. But I think it might be in a similar position to Apple.
The historic data, though, indicates that a lot of people are very reluctant to give up their Netflix subscriptions. Maybe even to the point that they’d rather give up their second cars.
| Year | Number of subscribers |
|---|---|
| 2024 | 301.6m |
| 2023 | 260.28m |
| 2022 | 230.7m |
| 2021 | 221.84m |
| 2020 | 203.66m |
There have been a couple of decreases in subscriber numbers – especially during the first two quarters of 2022. But there are a couple of important things to bear in mind.
One is that this might well have been due to unusually strong demand during the Covid-19 pandemic normalising afterwards. Subscriber growth has recovered strongly since then.
Another is that – Buffett’s observations notwithstanding – Apple’s iPhone sales fell at the end of 2023 and the start of 2024. So it isn’t as though demand for the firm’s products never falters.
The point is, even when inflation has been high, Netflix subscribers have generally prioritised its service in their household budgets. And that puts the company in a very strong position.
Impressive strength
I’ve been very impressed with how resilient Netflix has been. I think it’s shown itself to be a valuable service for its customers.
That’s particularly eye-catching given the challenges the business faces. Updating its content library requires ongoing investment from the business and results are not guaranteed.
Chair Reed Hastings has repeatedly stated that predicting what will resonate with viewers is extremely difficult. And that means there’s always a risk with the company.
Given this, Netflix’s consistent growth – both in terms of subscribers and in terms of revenues and profits – is very impressive. And in some ways, it’s even more attractive than Apple.
While iPhones have become more expensive, Netflix has introduced its ad-supported platform. As a result, it’s able to charge its viewers less, which further reduces the risk of them leaving.
I’m a big fan of businesses that keep their prices low – I think it makes for a durable competitive advantage. So I’m interested in the stock, but should I buy it now?
Time to buy?
Netflix shares currently trade at a price-to-earnings (P/E) ratio of around 61. Even for a business as strong as this one, I think that’s quite high.
My sense is that I’ll get a better opportunity to buy the stock in the future. But in the meantime, I’m going to be following closely to make sure I’m ready when the time comes.
