Cornerstone Crumbs: Inflation & Aggressive Growth

"The Lord bless you and keep you;

The Lord make His face shine upon you,

And be gracious to you;

The Lord lift up His countenance upon you,

And give you peace."

Numbers 6: 24-26

The mainstream perspective on inflation (Wallstreet driven) and it's impact on aggressive growth equities is that as inflation increases, future Cash Flow over time becomes less valuable, equating to a contraction of valuation multiples over the short-term. This is interesting as innovation's primary impact is typically to reduce inflation, or in other words, generate deflationary results.

Think of it this way, all the dynamics of streaming impact how consumers purchase physical goods, as well as access content. With the centralized distribution of streaming, combined with the proliferation of accessible content, many households now have streaming content bills, significantly below what was being paid for cable and/or satellite access.

My household as an example has a monthly Internet cost of $60, which is not all utilized for streaming. In my case, I can parse out streaming direct Internet monthly cost of $30. And our content spend for monthly subscriptions is currently $20. Over the year, we do end up purchasing owned content as well, and I've added a budget of $30 per month for this. So all-in-all, our household is paying $80 for what we consume through streaming monthly. Clearly, this is a great deal as we are paying less than traditional cable and satellite, while getting all the exclusive content we desire. This is a deflationary example, with the level of deflation completely at the discretion of each household.

In essence, the innovative centralized approach by streaming has ironically decentralized how households can choose their content. This is why Roku, Inc. (ROKU) is winning big, notably against centralized approaches from Apple, Inc. (AAPL), Amazon, Inc. (AMZN), and Alphabet, Inc. (GOOG). Big Tech streaming distribution is equally centralized, however, content access is biased towards their centralized platform and services versus more agnostic. This is why control of data is at heart in the dispute between Roku and Alphabet's YouTube.

So back to inflation, the statement above is used to justify why Roku's SP has declined. However, Netflix, Inc. (NFLX) has not been impacted as much. So my question for investors is, would you rather own a company that is the market leader by Revenue growth, and is experiencing Cash Flow inflection, or would you rather own a company that is witnessing slowing Revenue growth and seeing its Cash Flow turn negative during inflation?

For those unaware, Netflix generated $2.4 billion in OCF equating to an OCF margin of 10% during 2020. The driver for this was not a sustainable inflection, but rather an opportunistic mirage as Netflix no longer needed to spend on content production as the global government shutdowns forced all of the streaming consumer market to stay at home all day and night.

Switching gears to December 2021 and while global governments are still attempting to force people to remain in their homes all day and night, people are becoming wiser and doing what they please. The result on Netflix, they now need to compete again and their content spend has ramped back up and their OCF margin is now down to 2%.

Next year, Netflix is estimated to generate $35 billion or so in Revenue. I am modeling them to generate negative OCF. As Netflix continues to operate a business model that is incapable of generating positive OCF, the company will continue to need to borrow money through debt to grow the business.

Roku on the other hand, is growing exponentially faster than Netflix and has a more diverse business model that has witnessed Cash Flow inflection. At the end of 2020, Roku's OCF margin stood at 8%. As of today, this margin has increased towards 12%, a nearly 50% increase. Based on Roku's trajectory, the company is poised to see OCF/share growth on a diluted basis, annualized at nearly 60% from 2020 levels. Netflix on the other hand is at risk of seeing annualized declines from its inflated 2020 results.

So, on one hand we have a top Revenue growing company with Cash Flow inflection facing inflationary pressures, and on other hand, we have a company with slowing Revenue growth, declining Cash Flow towards negative performance over the near-term, and further needing to rely on capital debt raises. Hmmmm, I think without even getting too far into the weeds, it's pretty clear which company will combat inflation better. In fact, I argue that companies like Roku are some of the best inflationary hedges out there. This is why I completely disagree with the Wallstreet/mainstream narrative, it's a sham!

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