Sustainable Growth Advisers, LP on Netflix, Inc.
Thesis
Netflix detracted during the quarter despite solid first-quarter growth because second-quarter revenue and EBIT guidance came in below elevated expectations. SGA believes the core business remains attractive because the subscription model is recurring, churn is low and the company has demonstrated pricing power supported by a broad global content library. With the Warner Bros. Discovery acquisition no longer an overhang, management can focus on the core business and direct free cash flow toward AI investment and buybacks. The fund also sees longer-term opportunities in advertising, mobile initiatives and AI-driven production tools. SGA added to the position on weakness and raised its target to an average weight.
“We added to the position on weakness during the quarter, raising the target to an average weight.”
Key risks
- Near-term revenue or profit growth may fall short of market expectations