InvestorPlace Highlights Ensemble Capital Management’s Netflix Pricing Power Analysis
Will Ashworth at InvestorPlace wrote an intriguing article highlighting 7 companies exhibiting pricing power as a core feature to their business models, including two that Ensemble Capital has owned for client portfolios, Netflix (NFLX) and Apple (AAPL). Pricing power lies at the core of most great businesses — a point often talked about by legendary investors Warren Buffett and Charlie Munger.
In his profile of Netflix, Ashworth quotes our Senior Investment Analyst Arif Karim’s recent Intrinsic Investing post discussing Netflix’s Pricing Power:
“What’s less talked about is the strong pricing power Netflix has shown over the past 5 years since announcing its first price increase in May 2014, growing pricing globally at a 5% clip (7% in the US) since,” Arif Karim, senior investment analyst at Ensemble Capital, stated in a must-read October article in Intrinsic Investing. “Despite this increase in prices, it has continued to show very strong momentum in signing up new customers for its service around the world.”
Ashworth goes on to note: “Since 2011, Netflix has grown subscribers by 30% compounded annually. In Q3 2018, it increased paid memberships by 5.4% from Q2 2018 and 25% year over year. While the U.S. growth has slowed, international streaming grew by 39% year-over-year with plenty of the world still to cover.”
Netflix’s pricing power has indeed been a topic that has not been discussed much in the public sphere, but one which we believe is an important driver of both the company’s future business strategy (helping fund the build out its moat and global subscriber base) and its future value.
In addition, Ashworth also discusses Apple’s pricing power and offers an apt recent quote from Warren Buffett, who is listed as the second largest owner of company shares [via control of Berkshire Hathaway (BRK/A) as of 6/30/2018]:
“I have a plane that costs me a lot, a million dollars a year or something of the sort. If I used the iPhone — I use an iPad a lot — if I used the iPhone like all my friends do, I would rather give up the plane,” Buffett said on CNBC in August. “Now it’s got competition so you can’t push the price, but in terms of its utility to people and what they get for a thousand dollars…you can have a dinner party that would cost that, and here this is, and what it does for you, it’s incredible.”
Arif discussed Apple’s iPhone franchise, the great utility it offered its users, and its positioning as a luxury brand with pricing power in our discussion about the sustainability of Apple’s iPhone franchise in 2016, when many public discussions were being had about the death of innovation at Apple with a market valuation that reflected those doubts:
“This brings the focus on the well-designed device, its capabilities couched in a simple intuitive interface, its elegance, and the daily needs it fulfills as well as aspirations it can help the user attain. It’s a brilliant strategy that emphasizes the brand and emotion that creates the connection with its users while de-emphasizing the technology that can be threatened by the latest, greatest, cheapest competing gadget… while expensive at a face value of $650-$850, the iPhone and smartphones in general, are the most important and personal discretionary device the consumer owns. They serve as the gateway to your entire digital life that has grown to be a very important part of yourself. It is your most used device and will only increase in importance over time.
And, with a life span of two to three years, the cost of the average iPhone translates to less than $1 a day. This is an incredible value per hour of usage for the average smartphone user in any developed country as well as a significant number of users in emerging market countries. Given how much time owners of smartphones spend using their devices and how important a part of their lives they play, paying up for a premium, more secure, easier to use smartphone is one of the most practical luxuries they can pay for.”
For other great examples of companies with pricing power, we invite you to learn more by reading Will Ashworth’s article posted below.
As of the date of this blog post, clients invested in Ensemble Capital Management’s core equity strategy own shares of Apple (AAPL) and Netflix (NFLX). The company represents only a percentage of the full strategy. As a result of client-specific circumstances, individual clients may hold positions that are not part of Ensemble Capital’s core equity strategy. Ensemble is a fully discretionary advisor and may exit a portfolio position at any time without notice, in its own discretion.
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