IFB175: Too Much Money For a Roth, Selling Tesla and Netflix

Announcer (00:02):

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Dave (00:32):

All right, folks, we’ll welcome to Investing for Beginners podcasts. Tonight is episode 175 tonight. Andrew and I are going to answer a great listener question that we got recently. It’s a, in three parts. It’s a little bit longer, but we got some great stuff in here. We thought we had unpacked for you guys. So we could talk a little bit about some stuff. So I’m going to go ahead and turn over to my friend, Andrew, and let him chat a little bit. And then we’ll do us; we’ll give and take, Andrew. Tell me all about it.

Andrew (00:59):

Yeah, let’s, let’s dig into this. So got, they got the email here from Mike. He says hello, Andrew. I am extremely grateful for your advice. I’ve listened to and read your ebook. And I’m starting research on fenders with your VTI spreadsheets. And I’ll just say, that’s a great start.

Andrew (01:15):

So moving on, I want to begin funding a Roth 401k for future tax-free distributions to complement my 401k, but between my salary and my wife’s, we don’t qualify for the fund. The Roth, I am 37 and already have a 401k I’ve been investing in for 12 years. I recently read about alternatives to funding a Roth from two avenues, either a backdoor Roth conversion or distributing money from my 401k and rolling over to a Roth IRA. So there’s a lot of terms. There is a lot of jargon. I know we tend to get a good influx of beginners who tune into our shows. So Dave, maybe you can give us a brief overview of that. I can then talk about some of these things with the backdoor Roth because, you know, once you start to make a certain salary and become a high-income earner, some of the rules on ROS change. So why don’t you start on that first?

Dave (02:11):

Okay, thanks. I sure will. All right. So I guess a brief overview of the retirement accounts. So when we’re talking about retirement accounts, there’s kind of two types of accounts that you can invest in that are, have to do with taxes. So the first is what’s called a traditional, and the other one is called a Roth. And the main difference between them easily, I guess, is that one is with a traditional, you have to decide whether you want to pay your taxes now or later. So with a traditional, you invest your money, and you pay your taxes at a much later time. Preferably when you are retired and are starting to receive

Dave (03:00):

Income from your traditional account, a Roth, is money that you already pay the taxes upfront. And then when you start withdrawing the money, when you retire, you don’t own uncle Sam, any money. So here in the United States, those are the two accounts that you have now; with both of those accounts, you have the option of using it for stock market investments, which is what we’re talking about, but you can also do use them with bank accounts as well. So you can set up savings accounts, or you can set up CDs at your local bank, whoever you bank with, and you can use a traditional or Roth as investments. So those are, I guess, the brief overviews of those. Now they do have contribution limits, and that’s kind of what Mike was getting at in the question here earlier. So with a traditional neuropsych, they both have the same limit amounts, but it has more to do with your tax filing status, I guess.

Dave (03:58):

And so I’m sorry with a Roth; they have more of a controlling impact on how much you can invest with those based on what your filing status is for Texas. For example, with a Roth IRA, when you want to make investments, you make so getting back to that. So when you’re making deposits, you are allowed, investing up to $6,000 a year. If you’re single, if you’re over 50 years old, you get an extension on that of another thousand dollars. So you have a total of $7,000. You can invest in your Roth IRA every year. And if you’re married to, there are different limits for that as well. And I believe that traditional is the same amount. Now, these are for we’re recording this in October of 2020. They do generally change to my knowledge. They only go up, but it doesn’t go up every single year.

Dave (04:58):

So this is for the tax year. Those numbers I’m referring to are for the tax year of 2019 and 2020. We do have a new election coming up. We also have a new year coming up in a few months, and there is, I guess, a possibility to those numbers could change. So the best bet is before you open one of these accounts or you decide to start investing in one of these accounts is to go online and look up the contribution limits or talk to your accountant or your investment banker to find out what your options are as far as the taxes go. So those are, those are tax benefited accounts for you to invest in. One would be traditional, and the other one is the Roth. And again, the easiest way to remember one is I don’t pay taxes. Now I pay taxes later, traditional Roth, I pay taxes. Now I don’t pay taxes later. So that’s kind of an overview of those. So I know Andrew has a lot more information about the backdoor Ross. So I’m going to turn it over to him now.

Andrew (05:54):

Yeah. So yeah. Thanks for that. As a beginner, it can seem like a fire hose at times; you know, you can put as much money in the market as you want. It’s just these Roth accounts and IRA accounts, traditional IRAs, they give you a tax shield, you know, like Dave said, either upfront or on the backend. And so it’s something that you can take advantage of. Not everybody can, and it’s okay if you don’t. It’s just something we like to recommend because saving on one-half of taxes is always nice as you’re using Roths; as Dave mentioned, depending on your tax filing status and depending on your income, it’s going to change how much you can either deduct it on your taxes or how much you can contribute. As an example for a Roth, if you’re single and you make upwards of, I believe it’s $122,000 a year, then the amount you can contribute starts to scale down.

Andrew (06:58):

And once you hit another number, I think it was one 36 or one 30, $8,000 a year; then you can’t contribute to it at all. The question here is alluding to that where you’re in a situation where you make too much money where you can’t contribute to funding a Roth; they do have what’s called a backdoor Roth. And so it’s, it’s, it’s like a way to get around it, but it’s not illegal because if you read through the tax documents and the IRS rules, you’ll see these provisions in there. I guess most people probably don’t go through that. Is there this process I have at least for a recent tax year. So, you know, take that with a grain of salt. As Dave said, these tax rules can change over the years, and the amendments can be made.

Andrew (07:50):

But you know, if, if you’re looking to optimize your finances, it’s a good way to go. As it pertains to the backdoor Roth, I’m not a hundred percent expert. I’ll just tell you that. For one, if you are doing a backdoor Roth, from my understanding, you’re not allowed to have any money in a traditional IRA when you make that backdoor Roth. So one way to get around that would be to either withdraw the money from the traditional IRA, or if you have a 401k, you can transfer it to, then you can do the backdoor, Roth. It’s, it’s a very weird role. So if you have like a traditional 401k, you should take a backdoor Roth plan to still contribute towards a Roth. If you have a traditional IRA, you’re not allowed to do a backdoor Roth, and you have to move those funds to a 401k to do the backdoor, Roth.

Andrew (08:53):

So that’s something that I think that doesn’t get talked much about and is worth researching on your own. It’s not impossible the research, but it does take some effort. So that’s what I would recommend as far as that. He also mentions distributing money from my 401k and rolling it over to a Roth. I don’t, and I don’t see why you would have to distribute from your 401k to take to go to the Roth. It’s almost like biting your hand to feed your stomach. I don’t know when you’re talking about contributing to a Roth; you’re talking about $6,000 at most. To withdraw early from a 401k, it doesn’t make a lot of sense for most people because you have taxes and penalties that come with withdrawing from a 401k early. So that’s what I would say about that part of the question.

Andrew (09:48):

I know he has a couple of others, and maybe we can read those next. Yep. That’s good, that’s good, those are good answers. So, I didn’t know some of those things, so thanks for sharing it with us. So, okay. I’m going to move on to the next part of the question here. So he says I have a fair amount of money in the 401k already. I’ve been investing in it for about 12 years. There’s a new regulation in the cares act that allows early distribution of up to a hundred thousand dollars without penalty and three years to pay the tax. Some were sites say that you can use it to fund a Roth, even though this was not the intended purpose. Is this a legit option? Another funding option could come from selling Tesla and or Netflix, Stu two stocks. I happen to hold.

Andrew (10:33):

You have mentioned them a few times on the podcast is overvalued. So let’s, let’s, let’s tackle that, that Tesla and Netflix part at the end. I think that could be kind of fun, but we’ll finish up with my personal finance questions here. So if you can withdraw early from your 401k because of the cares act, you know, I don’t know if that means you have to prove that you’ve had financial hardship due to the pandemic lockdown. That would be something to research into. It’s not clear, you know, while you could be allowed to take the distribution early, without a penalty, there is nothing in there that says, you know, based on what Mike said, there could also be taxes. So as an example, if you, if you have a 401k, you’ve been putting money in for ten years, and if it’s just your regular old base model 401k, then once you sell that money, you know, you didn’t have to pay the taxes upfront, but once you, you sell your investments that are in there and you take your gains, you have to pay taxes on your gains.

Andrew (11:39):

So one of the beauties of investing in every single year you’re deferring taxes. And I think buffet might’ve been somebody who’s been quoted talking about this, where you get a huge compounding effect on your investments by just holding them. And that’s one of the best tax shields ever, because, you know, if you’re trading in and out of stocks, let’s say you make 10%, one year, you make maybe 11% the next year, but you’re paying taxes on that 10%. Then you’re paying taxes on that 11%. Your returns that you’re making after taxes are less. And then as you reinvest that money, that money you make on that money is the taxes come out. And then, so your compounding is less, and it’s less than this, less, but in the stock market, companies will compound their earnings. You’ll see the stock price is also a compound on themselves.

Andrew (12:31):

So when you see a stock rise from $30 to $33, it’s up 10% to go another 10%. It, it will compound from that new $33 amount. I think that’s what a lot of people don’t understand. And so as that continues over years and years and years, you have this, whether it’s 10%, 11% as the business is growing in value, the profits are growing, and you’re compounding, but you’re not getting that those taxes are taken out year after year after year, you’re able just to let it roll. And so that’s a huge tax benefit. If you’re talking about withdrawing from a 401k early, then you’re most likely going to have to pay taxes on it unless it’s a Roth 401k; in that case, you still have to sell out of investments early. And so, again, it kind of sounds like biting your hand to feed your stomach.

Andrew (13:30):

It doesn’t make sense to sell an investment to go into another investment, but then also have to deal with taxes and fees along with that, and, or interrupting any compounding that you had already. I would say try to don’t take a cue if you can do the backdoor, Roth. That’s great. If not, Oh, well, big deal. You know, if you’re blessed enough to have an income where you have to worry about Roth limitations, really that $6,000 a year, that’s going towards a Roth, probably isn’t moving the needle for your life anyways. So, you know, research it, see if it’s possible, but you know, don’t be trying to do some crazy maneuver and then shooting yourself in the foot and the process. That’s great advice. Fantastic advice, actually. All right. Let’s move on to the next part of the question.

Andrew (14:25):

All right. Following up with the last part of the question, I could sell $6,000, which is a maximum for 2020, then convert it to a Roth. What do you recommend? Number one, distribute some of the 401k or leave it alone to continue growing; number two, sell some or all overvalued stocks. Number three, start fresh and fund $150 a month. Like you’ve mentioned in the previous podcast. Thanks so much for everything you do and for putting the power in your hands. Mike. So Andrew, what are your thoughts on that? Plus, what I had mentioned earlier about Tesla and Netflix. Yeah. So the first part of that question, I do see where Mike’s coming from here. He wants to transfer some of that tax liability may be. Maybe he wants to make some money and get the taxes done upfront. And then if it’s converted to a Roth later, you don’t have to pay taxes on that later.

Andrew (15:19):

So, you know, that could be an option too. Like I said before, you know, be aware of, of the compounding and not getting, not interrupting that if you can, in the same token, if, if you feel like you have a year right now, or you have a lot of cash. You don’t mind paying taxes on a 401k to convert it to a Roth to get tax savings on the backend; you can do that too. I, I see the logic bear, I would just say, you know, just because there’s not a penalty for the cares act and the early withdrawal doesn’t mean you don’t necessarily have to pay taxes. Be careful with that, and be careful that there are capital gains taxes, and there are also taxes on the tax-deferred part of a traditional 401k. So understand there are two taxes there that they’re talking about, make sure you understand both of those, and talk about, you know, should I start fresh and fund $150 a month?

Andrew (16:19):

Yeah, I think that would be a great thing. But if, if somebody is in a situation where they’re making more, where a backdoor Roth is, is an option for them, I think you can do a lot more than $150 a month. There’s probably no unless you’re red lining your budget; I think to max out or a, or IRA contribution every year shouldn’t be a problem at that income range. And so if that were the case, I, you know, I hope people aren’t limiting themselves to just $150 a month because I’ve, I’ve found that as a good starting point and the good encouraging point is to get the ball moving. You know, if you can do more, definitely do more. And, you know, even on top of that, just because the contribution limits $6,000 a year, well, if I have more money in savings, you know, that money can go into the stock market, too.

Andrew (17:12):

Sure. You don’t have a regular IRA or a Roth IRA tax shield, but you can have a regular brokerage account and buy stocks just in the same way. And so I think that can be very valuable for people who are higher income and, and, you know, yes, you have to pay taxes, but it’s still, you know, you, you have the money sit in the savings account. You have to pay taxes on that too. So why not make money make more money? And I think it was it wasn’t Robert Kiyosaki, somebody, it might’ve been buffered again, said, you know, paying taxes is a good thing because it means you’re, you’re making money, and you have to make a lot of money to pay taxes. In that case, and when you’re talking about big dollar amounts, I would say, yeah, but as much as you, as you are comfortable with, and then let that compounding work, its magic, as far as the overvalued stocks.

Andrew (18:09):

I think that’s something that David can have a ton of fun with. That would be an option in this case, right. Essentially locking in some profits and then maybe on the back end, trying to convert that to a Roth and then getting in some good margin of safety type stocks that we always try to emphasize, right. Stocks that might not be as flashy but should grow and compound over time and give you a nice solid dividend payment. So that’s an option, and talking about Tesla and Netflix, I think congrats on having those stocks because those had done very well, depending on when you got in the question would be, you know, how do you look at those stocks now? And then do you continue holding them? And I think that’s a challenge. I would challenge any investor who has Tesla or Netflix if you’re going to hold, how long are you going to hold? Why are you going to hold? And you know, I know Dave, you probably have thoughts on both of those companies too.

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Dave (19:22):

For sure. I wanted to echo the great ideas that Andrew was passing along there, especially when you think about, if you have the opportunity to invest more if it works within your budget, then by all means, fire away. The more money that you set aside that can earn more money; even if it’s, even if it’s in a savings account or view by a bond fund even if those types of options aren’t making you, you know, gazillionaires, it’s still working for you in a much more than it is just sitting in a checking account, for example. So I think anytime you have an opportunity to put money to work for you, you need to try to take advantage of that. And I guess something I would be curious to figure out. It’s probably something I should look into is what would be the impact of investing in a non-taxable account over a 15, 20 year period and not selling anything and then having to sell at some point, cause eventually, you will have to sell at some point to maximize the money that you’ve made to live off of in retirement.

Dave (20:34):

So I guess that would be, I guess, something that I would be curious about along those lines and kind of moving on from there to the Tesla, Tesla slash Netflix by means sell them.

Dave (20:49):

I, I have been nothing but bearish on Tesla from the get-go, and I just, the more I read about all the different things going on in the world, I just cannot see a path for that company to be as successful as the price that it’s being marked in for at some point it is going to go down. I don’t know when, and I’m not shorting the company. I’m not, I’m not crazy, but I just, I can’t, and we get to give you a couple of examples of things that I’ve read about in the last couple of weeks. That, for me, cast even more doubt about what’s going on with Tesla. The first one is the news of what’s going on with GM GM recently announced that they’re releasing a Hummer that’s electric and converting some of their plants to make Hummers as well as Cadillacs.

Dave (21:49):

And they’re anticipating having up to 23 electric vehicles by 2023, which is a little over two years away from now. That’s huge. And when you think about the production capacity of a company like Tesla, I’m sorry GM compared to Tesla, Tesla is struggling to put half a million cars in a year. GM does that on Tuesday. I can’t see how a company like Tesla will be able to compete in the long run with a company like GM, and GM is not even here in the United States. They’re a big company, but I don’t the world stage in the world market. I don’t know how they rank. I’m not an insider in the auto industry. So this is just me talking. So take that for what it’s worth, I guess the other aspect, another figure to think about too, is this something Andrew mentioned to me last week was that Volkswagen has started producing electric cars in Europe.

Dave (22:51):

And I believe correct me if I’m wrong. They’re the number one producer of electric cars in Europe. And they do not number one, but they had a launch on their new electric vehicle. And it did a lot better than some of the Tesla numbers for that particular time and point. Okay. All right. Thank you for clarifying that. So again, another aspect of a huge company that’s making cars and now is moving more towards that. Now, this is in no way, shape, or form. Am I demeaning a Tesla vehicle or the accomplishments of Elon Musk or his intelligence? I just don’t think that the company is worth what is being offered in the stock market. It’s just; it’s, it’s just too expensive. It’s like; it’s like going and

Dave (23:46):

Buying a Porsche paying $300,000 for a $50,000 car. That’s really what you’re doing when you buy Tesla stock right now. Now, does that mean people have made money on it? Absolutely. They have. Have they made a lot of money in a lot of cases. Yeah, of course, they have. But at some point, it’s going to burst, and I would hate for people to be banking their retirement on Tesla, going from 420 bucks a share that it is now to $3,000 a share in the next six months to 10 years. I just don’t see that happening. And I worry for people about the company in that situation.

Andrew (24:24):

I guess I’ve talked a lot about Tesla, Netflix, I guess, wards on Tesla, of course, but so I, it’s not the neither of these stocks are on my radar at the moment. Everybody knows I’m a dividend guy.

Andrew (24:42):

And I looked for that dividend growth over time. That said, I think, I think they do deserve a little bit of defense, and maybe we can poke some holes in that too, but on the one hand, so they’re, they’re going to be the most vertically integrated car company that we’ve ever seen from like every aspect of it. So not only are they, you know, manufacturing in some of the most bootstrapped ways with, with some of the pictures that went viral last year about, you know, the manufacturing in these makeshift tents. But you know, they’re also working on getting the battery production in house. They don’t deal with the auto dealers. For example, one of the targets, so they’re right next to me, where I live right now has a Tesla area where, you know, Tesla cars can go and charge up.

Andrew (25:42):

And I don’t know if they sell Tesla vehicles there, but I know the mall, one of the malls close to me has like a Tesla store. So they’re doing things that none of these car companies have ever done there. They also kind of like a data play, and they’re almost like a software play. So with all the focus on the car’s workings and the fact that it’s so different from your regular internal combustion engine car, the data collection on these Teslas is expected to be huge. And, you know, we have data as a catalyst in a lot of different industries, making a lot of companies, a lot of money companies like Facebook, Google, Apple, you know, all those big guys, Microsoft, they all use data, and they’re able to profit a lot from, from the data.

Andrew (26:36):

They collect all that being said, you know, I, I, this was something I just, I go on these weird kind of curious journeys. And so for whatever reason, and I didn’t intend to look up Tesla. Still, I wanted to see that because we talked to Dave the other day about me, I found it very hard to justify investing in a car company in general because you have a vehicle that, if you do good, right. If you’re a company and produce a good vehicle, that means your customer will not come back. And I don’t know how good a business model is where you put out a good product and people don’t come back and buy another one from you for seven, 10, 15 years. Right. So it’s almost like a self-destructing kind of business model. But anyway, forget about that. I went on Google. Based on some of the other things I know from some of the auto-related stocks, I’ve owned our own or have covered the average amount of time until somebody replaces a vehicle about one in every seven years.

Andrew (27:43):

And so I was curious, okay, so how many people are there registered? So in the United States, there are about 250 million licensed drivers, or you would assume they would have a car or two, you know, maybe the people will have to make up for the people who have zero. And then, you know, how many percentages of that are buying new cars. So if you do the math, it’s about if every person who was licensed ended up buying a car, once every seven years, you would have about, about half of the people would do that. If, if I don’t know, does that make sense? Half of the people who could buy a car to stay at that. I’m going to buy a car every seven years; half of those people are doing that right now with 2020 numbers. Does that make sense?

Andrew (28:32):

Yeah, that makes sense. Yeah, it does. So, you know, we have about 50% of that. So, you know, yeah. You can make the argument that maybe 75% of those people, or maybe even a hundred percent, everybody will all of a sudden see the light and they’ll start upgrading their cars every seven years closer to the average, rather than keeping their cars longer. You could make that argument, but as it stands right now, with those numbers, you would be looking at, you know, and then I took the average price of a vehicle something around, I think the new vehicle is something like $35,000. So you multiply that. You multiply it with how many new cars are being sold, how often people are recycling them. And you have an auto market that’s somewhere around 500 billion. And if you do some Google searches, the some, some people have, have confirmed that it’s generally around there.

Andrew (29:26):

You always want to be careful when you’re on Google because there’s a lot of misinformation being spread about industry numbers and market sizes, especially. So be careful, but you know, it’s doing some, some checks like that can kind of help. So we’re talking about a company like Tesla at a $400 billion market cap in a car market. That’s $500 billion a year. So somehow, it doesn’t add up where I find that hard to believe that, you know, they could be training almost at a one times price to sales, but a price of sales of the entire auto industry. So they have a lot of good stuff going for them. I think they can; they can figure out profitability. I think the stock can run for a very long time, and it’s impossible to know when reality or rationality with ever set in if it ever does.

Andrew (30:21):

But I think as, as an investor, who’s, who’s trying to, investing reliably. I don’t see how you can make a case that buying Tesla now at these prices will be a reliable source of returns for you moving forward. It’s, it’s a very unpredictable stock. It’s a disruptor, but if you’re not listening to our show and you like what we talk about, and you subscribe to those ideas, it doesn’t fit into the idea. And so if it doesn’t fit into the idea, how long are you going to hold it? I’ll just hold it until it gives me a good profit, good luck with that. You know, it’s, it’s a very hard, trust me. It’s very hard to hold stock after it’s gone down, let alone a stock that you don’t even like. And it’s, it’s hard enough when it’s a stock.

Andrew (31:15):

You like and, and you’ve done the research, and you know why you’re buying it. And it becomes really hard when the stock price goes down. And so it becomes even harder when the analysis was based on the fact that one day they’ll figure out profitability or one day they’re going to do this one day. They’re going to do that. It’s a very hard thing to invest in when, especially when the floor falls out. Yes, I would agree with that. And you made some fantastic points, and I will agree with a lot of the things you were saying for me; it just really comes down to the fact that it is going back to my Porsche example, you’re overpaying for a quality vehicle, no doubt. And the few people I know have had them love them, but I can’t wrap my brain around trying to invest in something like that.

Dave (32:10):

I just, everything screams to me that it’s just not, as you were saying, it’s, it’s going to be, it’s going to be about, it’s going to be a volatile Bobby ride. The cult of Elon is real. The fanaticism of the people who invest in that company, I believe in what it’s trying to do, is real. And it’s volatile is, is the next to that word in a dictionary is a picture of his picture of Tesla. So there is no doubt that it’s a mover and a shaker, and it’s a disruptor for sure. They’ve changed the world of automobiles, which I think everybody would agree is a good thing. But I think it’s just the sheer fact of the company’s price just makes me nervous. So let’s, let’s move on to Netflix.

Andrew (33:03):

What are your thoughts about Netflix? Netflix is interesting. It’s, it’s almost on a league of its own. We won’t get super deep into the actual financials of it. Still, if you think about the way that their business is, they have to constantly, because, you know, originally Netflix started and they were just delivering movies. He’s almost like Amazon was delivering bucks, right? And then they moved everybody to the streaming platform, and they were getting a lot of licensed deals with a lot of different content creators. Many TV shows, you know, the office friends, these huge hit shows you can find on Netflix. Now those are starting to disappear. Companies realize how big of a competitor Netflix is. So you have companies like Disney, who, you know, do not only own everything Disney, but they own ABC. Now they own FX.

Andrew (33:59):

So they have their whole stable of content and TV shows and movies. And that’s all going away from Netflix and going onto their platform. You see that too with you saw it with at, and who owns HBO. And so, you know, they tried to do a similar thing with their HBO. Max NBC is NBC owned by Comcast. Are they different? I’m not a hundred percent sure either. So, okay. Well, I know NBC is, you know, they’re coming out with their streaming platform, the the the peacock app. So there, they’re doing things too. So you have all these competitors pointing, they’re pointing their targets on Netflix. And so now Netflix has turned into a company and, and, you know they’ve, I think they saw this from the beginning. They’ve always made it a priority to invest in their shows. And a lot of them have been good.

Andrew (34:59):

Black Mirror orange is the new black, you know, they’re the, I mean, people who go on Netflix a lot more regularly than I can, they can probably list off, you know, a list of a house of cards. I really liked that one, but you know, by now, there’s, there’s, there’s a long list of good shows and, and it’s, it’s proven to be a good business strategy. You know, many people, even with the shows that they’re dropping off, are still keeping their Netflix subscriptions. That being said, it’s a very tough business to be in, in the sense that you have to be constantly spending. So in the case, Netflix, they even disclose this in their annual report. They said that their content assets, after about four years, are about how long that content assets valuable for.

Andrew (35:50):

And then they just got to; they got to produce more and more and more and more of it. So, you know, on the one hand, you have that aspect of it. On the other hand, they’ve done well compared to where they were when it comes to increasing revenues and increasing revenues, not just increasing them, but increasing them to a point where they’re finally profitable. And the question now becomes, are they able, are they going to sustain that moving forward? Because if they are, it’s probably going to be a fantastic investment, and you might still be in the middle innings of this. Still, if they’re not, that’s where you’re going to see a huge problem because not only do you have the problem of constantly needing to spend money to keep the content fresh on the platform, but then you also have the problem of, you know, if, if, if subscribers are leaving. You’re still desperately trying to spend on content, and it’s not working, then you, you’re trying, you’re trying to put this fire out.

Andrew (36:55):

And, and it’s like, it’s like a boat where you’re trying to, you’re trying to plug the hole, and it’s just, the boat keeps sinking. So they need to continue growing and figure out how they’re going to squash the competition and continue to grow profits. And I think it’s going to be interesting. I don’t know which way they’re going to go one way or the other, but I think they’re a unique business in that so much of their business is based on spending on content. And, you know, the platform itself is pretty cheap, but that’s the content that, that is expensive. And so in this case, content is keen on that. I think that could decide how this business goes.

Dave (37:42):

I would agree. And I think there are several interesting questions about Netflix when you compare it to other companies that are part of the Fang grouping.

Dave (37:56):

If you look at just the margins alone and some of the other metrics that you would measure, kind of all the companies with theirs are probably, they’re not bad. And I’m certainly not going to say they’re bad, but if you compare them to the Microsofts, the Facebooks, the apple Googles, they don’t, they don’t line up, they don’t stack up. It’s interesting, you know, when you look at the financial part of it, they don’t look like they’re as strong as some of the other companies included in that grouping. But the flip side of that is you have this platform like Andrew was talking about that is completely sticky in,

Dave (38:36):

I don’t know what their churn numbers are. And when I’m talking about churn, I’m talking about how many people they have signed up for the platform subscribed to Netflix. And basically, it stays with them or people that sign up we’ve signed up. We have that kind of thing. So I’m not sure what their numbers are compared to other viewing platforms that are out there. Over the last few years, the rise and competition have started to accelerate because, like Andrew was saying, these people have discovered that there’s money to be made. And in a lot of cases, a lot of money to be made. And that has given rise to Disney plus and Hulu and peacock and HBO max, and just on and on and on. And I just think that for me, I mean, I love the product. I use it. I’ve been using it for years.

Dave (39:30):

I was one of the first people in the cutting cable realm, which is kind of ironic because you cut the cable because it was too expensive. And now you start heading all these other platforms on, and pretty soon you got YouTube TV, and then you got Netflix, and you got Amazon prime and all these other things, the next thing, you know, you’re paying more than you did for cable back in the day. Anyway, my point is that they have created a very sticky platform that I think will bode them well now and into the years to come. I that I worry about with them, are also coming into the content creators’ realm and getting on the, I guess the best way of putting it is they’ve had to change their model a little bit over the years.

Dave (40:18):

As Andrew said before, they could take all the other shows and put them on their platform, but now those entities have decided that they want to make money on their content, and lead Netflix to start fending for themselves as far as the content goes. Now they’ve done an awesome job of creating a lot of great shows. Some of the ones Andrew was mentioned, including, you know, and stranger things more recently, and the show that I liked the last kingdom. So there’s, there are all kinds of stuff. There’s something for everybody. But I guess the point that I, that makes me nervous about the company is that once they start down that content a merry-go-round, if you will, is that they’re only as good as the last show that they created, that’s popular and what are they going to do?

Dave (41:08):

How are they going to grow? How are they going to continue to entice people? Then it becomes a little bit more like; I guess I feel like it becomes a little bit more like ABC, NBC, and CBS, where that was, what they had to do was create all this content constantly to entice people, to watch their networks, to get people, to watch the ads that were on the networks. Cause that’s how the com that’s how ABC makes their money. And so Netflix makes it by subscriptions. They don’t make buy ads. So how are they going to do this? Are they going to be able to country keep creating? You know, binge-worthy, everybody’s got to watch, it shows like stranger things, or are they going to have more niche things that are maybe not as popular, but they create their buzz if you will.

Dave (41:56):

So I think they got, they got some headwinds ahead of them. I think for sure. I would feel like maybe out of the faint companies; you could argue with me if I’m wrong. Still, I would feel like with the thing companies, in particular, they, I think they have the toughest road up the row to hoe in the next coming years compared to Facebook, Apple, and Google, for example, I just think they’re going to have the biggest challenge to, to continue to stay competitive with those companies in particular.

Andrew (42:27):

Yeah. That’s a fantastic insight. I completely agree.

Dave (42:30):

All right, folks. Well, that is going to wrap up our conversation for this evening. I wanted to thank Mike for taking the time to send us that great question. There was a lot of great stuff in there for us to talk about some cool things to, I guess, help educate people a little bit about things that maybe they’re not as familiar about. So thank you again, Mike, for taking the time to send that to us. And I hope you found our answer was helpful for you. So without any further ado, I’m going to go ahead and sign us off. You guys go out there and invest with a margin of safety emphasis on safety. Have a great week, and we’ll talk to you all next week.

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