Why Netflix Isn’t In WisdomTree’s Growth Leaders Fund – And Hasn’t Ever Been

 

 

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FAANG is now FAMGA (Facebook, Apple, Microsoft, Google, Amazon). This is the message Applico has been communicating for the past couple years, dating back to Alex’s Fox Business interview in 2019. And since Netflix’s annual report was released this month, Netflix’s high-growth tech story has been debunked. Instead, Netflix is just a movie studio with better digital pipes than its competitors. And, unfortunately for Netflix, those pipes can be replicated.

Why is it that Netflix has fallen out of grace so quickly with investors? Because it’s not a platform business. And that’s precisely why it’s not in the WisdomTree Growth Leaders Fund (PLAT), which seeks to track the price and yield performance, before fees and expenses, of the WisdomTree Growth Leaders Index (WTMDPL).

 

A platform business connects two user groups together: consumers and producers (in this case, content creators). Let’s compare YouTube versus Netflix as a comparison of platform versus linear. YouTube has millions of content creators who willingly contribute videos onto the YouTube platform—for free! YouTube doesn’t have to pay licensing fees or make upfront payments for content. Said another way, almost all of YouTube’s content sits off the balance sheet. It’s contributed onto the platform by content creators—producers—who hope to gain audience and/or revenue share from advertising.

Netflix, on the other hand, has more than $26 billion of “non-current content assets” on its balance sheet as of April 22, 2021. And its profitability is entirely dependent on how quickly, or slowly, it depreciates those content assets. Not to mention, after achieving positive free cash flow (FCF) in 2020, the company has signaled a return to negative free cash flow as movie production ramps up again. 

 

Outside of the financials, let’s take a step back and look more broadly at the competitive landscape and what really matters for investors: growth.

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Disclosure: Please visit PLAT’s Fund detail page for its current holdings.

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