Money Matters - Simplified

This Could Be the Brand of the Century

 Good companies make great products. Better companies build a strong, recognizable brand around those products. And the very best companies receive that rarest of honors: becoming a verb.

 

 Oh, to be a verb!

Netflix (Nasdaq: NFLX) is part of that rarified band of companies-turned-verbs. We talk about "Netflixing" the movies we love, the same way we Google (Nasdaq: GOOG)information online. Netflix revolutionized the home-entertainment industry by sending movies to us in the mail, then did so again by putting digital streaming video on nearly every type of gadget imaginable. The product is great; the brand takes it over the top.

David Muir, co-author of The Business of Brands believes that brands help build business value in four ways:

  • Greater revenue
  • Higher and more defendable gross margins
  • Less systematic business risk
  • Larger and more stable cash flows

Let's take a look at Netflix in the context of this framework. Here's the company's revenue since 2002:

 

As you can see, Netflix has been able to grow revenue at a very healthy clip over the past eight years. Now take a look at gross margin, also since 2002:


 Not too shabby. However, in moving toward a higher-margin model of digital distribution via streaming, the company's also paying more for content. It will be worth keeping an eye on margin trends going forward to see how this affects performance.

Systematic risk comes from forces outside of the company's control, and brand power can certainly help mitigate this risk. Just look at the last few years. The market has had a tougher time of it than Tiger Woods and Lindsay Lohan put together, yet companies like Apple(Nasdaq: AAPL) and Coca-Cola (NYSE: KO) continue to outperform the market substantially. These are globally recognized and, for the most part, widely admired brands that people relate to day in and day out.

Well-run companies with strong brands tend to see strong and consistent cash flows over time. With the right management team in place, this steady cash generation helps to build shareholder value all along the way. Take a look at the graph below:


 Netflix has been able to generate stronger cash flows, and the share price has skyrocketed in response. Anyone who bought into Netflix back in 2002 has made out like a bandit, generating close to 60% compound annual returns. Can these amazing gains continue? That's anyone's guess. The space is sure to become extremely competitive. But look at it this way: Netflix has about a $9 billion market cap today. If I gave you $9 billion and said, "Go dethrone Netflix," could you do it? Would you even know where to begin? As the brand people know and trust, Netflix has a tremendous advantage.

Conjugate it!
Is Netflix successful because it has a killer brand? Or has its success helped build the brand to its current mighty stature? Either way, the company's a trailblazer in a market with abundant room left for growth. I remember when we started conjugating "Google," and how funny I thought that was at the time. But look at where that company is today. Now that we're doing the same with Netflix, it might be worth considering how powerful this brand really is.

© 2010 UCLICK L.L.C.