TIP711: Netflix, Ferrari, & Managing Market Volatility w/ Arif Karim
Apr 4, 2025
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In this engaging conversation, Arif Karim, a seasoned Co-Portfolio Manager at Ensemble Capital with over 25 years in investing, shares insights on Netflix and Ferrari. He discusses Netflix’s evolving strategies to combat subscriber growth challenges and the importance of its competitive moat. Arif also highlights Ferrari’s unique market position and adaptability, especially during economic downturns. He delves into both companies' valuation approaches, emphasizing innovation and resilience as key to success in fluctuating markets.
Netflix's strong competitive moat, driven by its scale and customer-centric culture, ensures its leadership in the streaming industry.
The volatility in Netflix's stock price highlighted the necessity for investors to remain informed and maintain conviction during market fluctuations.
Ferrari's exclusivity and well-structured business model allow it to thrive in luxury markets, even amid economic uncertainties.
Deep dives
Netflix's Competitive Moat and Business Model
Netflix's success can be attributed to its strong competitive moat, enhanced by its ability to offer unique value to its customers. The company has established itself as a leader in the streaming industry, driven largely by its massive scale, which allows it to spend significantly on content while maintaining low per-unit costs. Furthermore, its customer-centric culture emphasizes quality viewer experiences, thereby helping to retain subscribers and attract new ones. With over 300 million subscribers globally, Netflix utilizes its technological prowess to ensure high-quality streaming, expand its content library, and protect its market share against increasing competition.
Managing Share Price Volatility
The drastic drop in Netflix's stock price from November 2021 to June 2022 served as a harsh reminder of the company's volatility amid aggressive growth projections. During this period, Netflix lost nearly one million subscribers for the first time in over a decade, prompting market reassessments of its growth potential. Investors faced a dilemma rooted in evaluating whether the downturn was indicative of a permanent shift in the company's business model or merely a temporary setback. The experience underscored the necessity of in-depth market understanding and the importance of maintaining conviction in one's investment strategy, particularly during turbulent times.
Growth Initiatives amid Subscriber Slowdown
In response to stagnant subscriber growth, Netflix implemented several strategic initiatives to drive renewed interest in its service. These included cracking down on password sharing and introducing a lower-priced ad-supported subscription tier aimed at converting non-paying viewers into subscribers. By adapting to evolving consumer behaviors and expectations, Netflix effectively addressed the challenges posed by heightened competition while creating new revenue streams. These efforts ultimately led to a remarkable rebound in subscriber growth, with the company adding millions of new subscribers in 2024 alone.
The Unique Business Model of Ferrari
Ferrari's business model is predicated on the exclusivity of its vehicles, allowing it to maintain high profit margins even in challenging economic climates. The company produces a limited number of cars each year, which enhances demand among high-net-worth customers. This strategy not only protects Ferrari's brand integrity but also ensures that its products remain highly sought after by collectors and enthusiasts alike. Furthermore, the strong connection between Ferrari and its customers fosters loyalty, creating a community of affluent car owners who are eager to invest in additional models as they become available.
Luxury Sector Resilience and Ferrari's Performance
Despite a broader slowdown in the luxury market, Ferrari has managed to flourish due to its well-structured business model and demand for high-end products. The company had already sold out much of its 2023 production well into 2024, indicating robust consumer interest despite economic uncertainties. High cancellation rates among luxury car orders are less of a concern for Ferrari because of the tiered nature of its clientele, where a market of eager customers eagerly awaits high-end models. Thus, Ferrari's sales strategies and order management allow it to remain insulated from economic downturns that adversely impact other brands.
Navigating the Shift to Electric Vehicles
As Ferrari prepares for the launch of its first electric vehicle in 2025, the company faces the challenge of meeting evolving customer expectations without compromising its brand identity. While electric vehicles traditionally lack the throaty engines associated with high-performance cars, Ferrari has a strong customer relationship that may help facilitate acceptance of electric models. The company's commitment to maintaining performance standards and high-quality engineering in its upcoming EVs suggests a path forward that honors its heritage while innovating for the future. Ultimately, Ferrari's approach to diversifying its product lineup will be guided largely by customer feedback and demand metrics as the automotive landscape evolves.
On today’s episode, Clay is joined by Arif Karim to discuss Netflix and Ferrari. Arif has studied both businesses for many years as a co-Portfolio Manager at Ensemble Capital and knows these companies as well as about anybody.
Arif has been in the investment industry for over 25 years, and is currently working on transitioning to his new venture in the industry.
IN THIS EPISODE YOU’LL LEARN:
00:00 - Intro
01:31 - What is Netflix’s moat, and what makes it a great business?
10:45 - How Arif managed the share price volatility of Netflix in recent years.
21:34 - The growth initiatives Netflix pursued in light of the slowdown in subscriber growth.
42:02 - Why Ferrari is a business with win-win relationships similar to Costco.
01:09:04 - How Arif thinks about Ferrari’s and Netflix’s valuation.
And so much more!
Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences.
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