Below is Ticky Fullerton’s article ‘Loftus Peak’s Alex Pollak sticking by his firm’s holdings in Netflix′ which was originally published in The Australian Business Review on 22 April 2022. For the original article on The Australian website, please click here.
Loftus Peak chief investment officer Alex Pollak is sticking by his firm’s holdings in Netflix as one of the long–term winners in the streaming wars.
He warns that concept stocks like Snap and online gaming platform Roblox pose far more risk among the tech stocks that soared during the pandemic.
Instead, Pollak has shifted the firm towards what he calls the picks and shovels, the semiconductor stocks. Loftus Peak invests in listed disruptive businesses such as Apple, Microsoft, Netflix and Qualcomm.
Pollak has been involved disruptive business models for more than 25 years, including through the 2001 dotcom boom and bust, and as a Macquarie banker brought businesses such as Seek and Carsales.com to market.
A shock announcement from Netflix on Wednesday wiped about $US40bn ($54bn) of the value of the streaming giant after it disclosed that it had lost 200,000 subscribers in the first quarter. Its forecast had been growth of 2.5 million subscribers.
While the discrepancy included a hit from the loss of 700,000 paying subscribers in Russia, Netflix admitted problems were deeper, including a freeloading on subscriptions and the end of pandemic lockdowns that delivered a captive audience – all of which raises questions around market growth.
Loftus Peak’s Alex Pollak sticking by his firm’s holdings in Netflix. Netflix is the latest casualty in a broad market correction of tech stocks this year that has left many household names trading at or near sobering 12-month lows.
The Loftus Peak portfolio (which since November 2020 can effectively be traded on the ASX as an ETF) has generated an annualised 20.52 return since November 2016. But in the last year that figure is 1.58 per cent.
But Pollak’s picks have fared better than some other asset managers specialising in the disruptive space. Shares in Cathy Wood’s high-profile ARK Invest based in Florida has fallen 58 per cent from its 12-month high. From its highest in November, Loftus Peak has fallen 20 per cent.
Pollak still has high conviction for Netflix in the longer term. He says the takeout from the result is not the end of the pandemic, which has seen cuts to subscribers across the streamers. It is the question of future growth and what the addressable market really is for Netflix.
“One hundred million people sharing passwords shows you that 100 million people still want the service and are not paying for it,” he says. “Is Netflix more or less at peak subscription at 200 million? You would be asking that same question with or without Covid. But are we yet at peak subscriptions with password sharing, now that household budgets are stretched?”
Pollak argues that in any event, the moat Netflix has created between itself and competitors is enormous. He says Netflix spends about $US18bn a year and it effectively breaks even in a cashflow sense.
“It is an engine that promotes content and requires no funding debt or equity to make it happen,” he says. “Apple and Amazon Prime, even with MGM, are nowhere near that level of content spend and rely on their other businesses to support them. But HBO has a debt burden under the Discovery channel.”
In the streaming wars, Pollak agrees that Disney also has a serious engine based around Star Wars and comic book heroes and that children are an important market. But to go after the Netflix series market will require new big spending on general entertainment, and lots of it.
Loftus Peak’s Alex Pollak sticking by his firm’s holdings in Netflix NBC Peacock has started out using Universal content, but it has a mountain ahead to climb. Over six years, Netflix has spent $US75bn in largely fresh content.
Looking back at 2001 and the black-skivvies dotcom bubble and bust, Pollak says the market correction was far worse, but the dotcom era created huge new multinationals.
“It was clear that the new world of technology was correct,” he says, pointing to the end of the rivers of gold in classified advertising and the rise of the tech giants that followed.
War and increased global insecurity has knocked much of the tech sector as funds flow back to the traditional energy and other commodity stocks.
Within the disruption space, Pollak is applying a different scrutiny to his portfolio, steering away from what he describes as long-dated hopefuls or concept stocks. “Stocks like Roblox and Snap – they may succeed but this is the end of easy money. We are dealing with a world of rising interest rates where the ability to raise debt gets harder,” he says.
Loftus Peak is firmly invested in the semiconductor business, where Pollak sees demand for high performance computing and data centres firmly outstripping supply. The largest holding in the portfolio is in US company Qualcomm. It has shares in Nvidia and Taiwan’s TSMC.
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