$NTDOY: is Nintendo's flywheel actually there? | Accrued Interest
Simeon McMillan’s Nintendo bear case is that Nintendo remains a cyclical hardware company whose promised flywheel has not appeared. Strong Switch 1 software sales are extending the old cycle, but Switch 2 needs new system-selling releases to migrate the audience; after bundled Mario Kart, the holiday centerpiece is a Zelda remake and Pokémon may not arrive until spring 2027. His conclusion: Nintendo may work as a trade around releases, but it is “not a stock you can put away and forget about.”
Andrew Walker sees Nintendo’s remake economics as evidence of an unusually renewable “oil well,” while McMillan sees a content gap masked by nostalgia. A decades-old Zelda remake could become a global bestseller, but McMillan argues Disney kept its franchises fresh through acquisitions rather than endlessly producing “Mickey Mouse part 10.” Nintendo’s second Christmas without another flagship title therefore rests heavily on older IP, third-party games already released elsewhere or years old, and fans whose reaction to its showcase was effectively: “That’s it?”
The weakest flywheel evidence is the combination of a low attach rate and stagnant subscription accounts. Switch 2 buyers are purchasing fewer games than Switch 1 buyers did at launch, even though the free bundled Mario Kart—“their Avengers game”—inflates the figure; bulls counter that existing Switch 1 libraries reduce the need for new purchases. McMillan’s sharper rebuttal is that Nintendo’s disclosed online subscriber count has been roughly flat over the last couple of years: “They’re milking more and more out of a strong fan base.”
Hardware inflation and Nintendo’s limited online strength constrain the margin story. Memory costs forced an unusually early console price increase when consoles normally become cheaper, making a Switch 2 Lite unlikely soon; margins should improve as software mix rises, but another hardware generation eventually resets them. McMillan wants two or three movies annually, a dozen parks, and far more television before treating licensing as a recurring, high-margin engine.
Pokémon demonstrates both Nintendo’s IP potential and the fact that Nintendo captures only part of its economics. Walker estimated that Nintendo owns roughly 35%, while cards, toys, collectibles, and other consumption keep younger users engaged beyond games; Walker calls that ecosystem the blueprint for Mario and Zelda. McMillan agrees it is “the ideal,” but partial ownership means Pokémon cannot move Nintendo’s economics as much as a wholly owned franchise could. McMillan also said he believed Pokémon Go had been sold to a gaming company he thought was owned by a Saudi conglomerate.
Spotify is McMillan’s cleaner compounder because label bargaining power has shifted, premium subscriptions keep compounding, and margins now have a credible runway. The 2024–2025 licensing resets lowered royalty rates as Spotify grew, while podcasts moved from “a money pit” toward profitability and extra audiobook credits reportedly reached roughly a $100 million run rate. At about 40× earnings and low-double-digit revenue growth it is not cheap, but McMillan sees high-teens-to-20% earnings growth, operating margins rising from roughly 14% toward 20% by 2030 and potentially 30%, plus 25–35% upside without multiple expansion.
Netflix looks cheaper than Spotify—roughly 18–20× earnings versus about 40×—but McMillan assigns Spotify higher conviction because its competitive path is cleaner. Netflix’s low-double-digit revenue growth, low-to-mid-30% operating margins, path toward 40%, global distribution, sports reach, and ability to “feast” on linear television make it a value stock; however, YouTube and irrationally persistent media rivals will remain. Netflix’s global scale lets it spread content costs over a much larger potential audience, and it is also picking off leading YouTube creators, sometimes exclusively, using YouTube as a kind of pilot season. Its long-term possibility is an entertainment super-app that bundles other services and takes a cut, but near-term alpha must come from earnings: “Follow the earnings, not the noise.”
Walker and McMillan disagree most sharply over generative AI’s threat to filmed entertainment. Walker extrapolates from the crude Will Smith cheeseburger clip to a possible two-year-horizon AI sitcom overseen by one writer—even a Friends knockoff called “Acquaintances”—while McMillan sees today’s output mainly as YouTube children’s slop, fake trailers, and copyright arbitrage. His defense is that media only looks formulaic: templates do not reproduce “that last little 2% that makes it magic.”
1. Nintendo has not escaped the console cycle
McMillan’s central distinction is between a company worth trading and one worth owning through a cycle. Nintendo may be attractive when depressed or ahead of a major release, but the stock is “not a stock you can put away and forget about” because revenue and enthusiasm still depend on periodic hardware upgrades.
The promised flywheel required Switch 2 software to pull Switch 1 users into the new ecosystem. Nintendo has kept old software selling longer than McMillan expected, but that achievement may merely elongate Switch 1’s life rather than prove that Switch 2 has become a durable platform.
He acknowledged that Nintendo retains real franchise power and that the stock had rebounded from its lows. His objection is duration: a release-driven 20% move does not settle when to exit, and he needs enough new software visibility to justify holding for more than a year.
2. Switch 2 lacks enough system-selling releases
McMillan’s hierarchy of Nintendo’s tier-one properties includes Mario Kart, the cycle’s main Mario title, Super Smash Bros., The Legend of Zelda, and Pokémon. Switch 2 launched with Mario Kart in the bundle—an unusual giveaway that he believes prevented materially weaker hardware sales.
The next holiday slate does not provide comparable breadth. Its biggest title is a Zelda remake, while Pokémon appears slated for spring or Q1 2027 without a firm date; by then, investors are being asked to wait deep into another calendar year for the platform’s next obvious system seller.
Walker’s bull framing was sharper than simply defending the release calendar: if a decades-old remake can become a top-five global game, Nintendo resembles Buffett’s old description of Disney as an oil well that refills. “Who else could re-release a game and have a bestseller?”
McMillan conceded the remake should perform, but argued that Disney refreshed its well through acquisitions and new franchises rather than “Mickey Mouse part 10.” Marvel itself eventually showed fatigue and brought back Robert Downey Jr.; durable IP still requires replenishment.
3. Nostalgia can sell software without building the next audience
Walker agreed that Switch exclusives—not superior graphics on a title like Resident Evil—drive the hardware purchase. His tension with the bull case is that investors call Nintendo the next Apple while repeatedly hinging excitement on another Star Fox, GoldenEye, or Ocarina of Time remake.
McMillan cited the market and fan response to Nintendo’s presentation: the stock began falling during it, while non-investor gaming reviewers reacted with “That’s it?” Beyond remakes, Nintendo highlighted third-party titles already released elsewhere or several years old, increasing the burden on Zelda to carry the season.
Zelda also lacks Mario’s resonance with younger children, in McMillan’s view. He did not call the forthcoming movie a box-office failure—it “will probably do well”—but rejected treating it as equivalent to a Mario Galaxy film or evidence of equal franchise reach.
4. The attach rate challenges the ecosystem narrative
McMillan defined attach rate as the number of games purchased with a new system, making it a rough measure of enthusiasm. Switch 2’s initial rate was materially below Switch 1’s, and bundling Mario Kart—possibly Nintendo’s bestselling franchise—makes the comparison look better than the underlying purchasing behavior.
His analogy captured the concern: Nintendo effectively gave away “their Avengers game.” The attach rate should improve as bundled units become a smaller share, but continuing domination by Switch 1 titles leaves him unsure that users are embracing the new software generation.
Walker supplied the bull rebuttal in full: upgrading owners already possess Switch 1 libraries, and subscription access to the back catalog naturally suppresses purchases. Under that interpretation, low attach is not weak demand but evidence of a sticky, healthy ecosystem around an exceptionally successful system.
McMillan’s response was the “elephant in the room”: Nintendo’s disclosed online subscriber count has been approximately flat over the last couple of years. He would reconsider if subscriptions showed momentum; absent that, the company is “draining more out of the cow until Pokémon comes.”
5. Memory inflation makes the usual console economics worse
Walker traced the immediate pressure to memory prices: console makers normally benefit as components get cheaper over time. Nintendo instead faced a choice between swallowing roughly $150 of added memory cost, by Walker’s estimate, or raising price and sacrificing some demand.
McMillan emphasized the signal from raising Switch 2’s price so early. Consoles typically become cheaper and eventually spawn lower-priced variants such as Switch Lite; the increase implies Nintendo itself does not expect memory relief soon, so he is “not expecting a Switch 2 Lite anytime soon.”
That pressure compounds the software gap. The existing Switch 1 library may bridge demand for a while, but Nintendo is asking consumers to pay more before supplying a full slate of new exclusives—a difficult setup for the holiday period when console volumes normally peak.
6. Margin expansion is real but cannot eliminate hardware resets
McMillan agreed that margins should recover as higher-margin software becomes a larger share of sales. His dry formulation was that the best margin outcome would be for Nintendo “never [to] release another console”—yet the exclusive ecosystem requires new hardware eventually, so profitability must continue to ebb and flow.
Nintendo’s online weakness also limits the 40–50% operating-margin vision some bulls describe. Its multiplayer heritage centers more on friends in the same living room than persistent global online play, while putting back-catalog games on sale is ordinary industry behavior rather than proof of a new service engine.
Walker described Nintendo as a great niche company whose strategy does not consistently maximize shareholder value. He argued it might have commanded an enormous acquisition premium in 2020–2021, while its limited mobile and online presence reflects a company run for its own institutional vision.
7. Nintendo’s IP flywheel is too small and too lumpy
For licensing to change the P&L, McMillan wants “two to three movies a year, every year,” not occasional releases; similarly, he wants roughly a dozen parks and substantially more television. A few attractions and films do not yet create the recurring, high-margin universe embedded in the bull thesis.
Netflix’s announced deal to develop shows around Sega and Sonic IP offered his preferred model: Nintendo could use an arm’s-length licensing deal while others fund distribution. Instead, its insistence on going alone keeps output scarce and the economics lumpy.
Walker worried that scarcity is consuming nostalgia without replenishing it. His young daughter already knows Mickey Mouse despite limited television exposure, whereas Mario and Zelda lack comparable omnipresence; millennials will retain affection, but neglected children can become 22-year-olds with no inherited attachment.
8. Pokémon is the blueprint Nintendo only partly owns
Both speakers treated Pokémon as a particularly durable property. Games remain strong, but cards, toys, and collectibles give younger audiences many ways to participate; McMillan admitted he never expected Pokémon cards to endure and said, “More power to them. I didn’t see that coming.”
The economic limitation is ownership. Walker estimated that Nintendo holds roughly 35%, and therefore Nintendo does not capture all of the consumption occurring outside games; McMillan wished it owned 100% because the franchise could then move Nintendo’s consolidated results much more powerfully. McMillan also said he believed Pokémon Go had been sold to a gaming company he thought was owned by a Saudi conglomerate.
Walker viewed that incomplete capture as proof of brand health, not a flaw in Pokémon itself. Its entrepreneurial ecosystem shows what Mario and Zelda could become if Nintendo pursued licensing and non-game experiences more aggressively; McMillan agreed it is “the ideal,” but not yet enough to support a two-year Nintendo holding period.
9. Spotify’s label reset changed McMillan’s mind
McMillan framed his Spotify thesis as a mea culpa: he missed the stock from roughly 2024 after assuming labels would perpetually hold margins hostage and Apple’s platform tax would remain burdensome. His piece calls Spotify “a quiet compounder that I will never underestimate again.”
The 2024–2025 label renegotiations were the turning point. Spotify’s royalty rate declines as subscriber growth and a basket of related metrics improve, aligning the ecosystem around expansion; Walker’s less diplomatic interpretation was that Spotify won and can increasingly tell labels, “It’s our way or the highway.”
Scale now matters more because earlier alternatives such as Tidal and Deezer have fallen away. Apple Music, Amazon Music, and YouTube Music remain, but Spotify defended its position against all three and emerged as the clear leader; McMillan regards YouTube as the most important surviving threat.
Label concessions can also arrive through marketing. In radio, paying for spins evokes illegal “payola”; digitally, playlist placement and algorithmic nudges can be sold as promotion, lowering Spotify’s royalty burden while giving labels access to what McMillan called one of music’s most valuable advertising surfaces: the Spotify homepage.
10. Premium, podcasts, and audiobooks now support Spotify’s margins
Advertising has underperformed, and its share of Spotify revenue has fallen—the opposite of traditional media, where free, ad-supported consumption often dominates. McMillan still lists that weakness as a risk, but premium revenue has continued growing at a mid-teens rate for much longer than he expected.
Podcasting changed from trophy-deal excess to a more disciplined business. Joe Rogan may have earned his economics, while deals such as Prince Harry and Meghan were shorthand for the broader overpayment; Spotify subsequently pulled back enough for podcasts to move from “a money pit” toward a positive business.
Audiobooks add both engagement and direct monetization. Management said sales of extra audiobook credits or listening hours reached roughly a $100 million annual run rate unusually quickly, though the company does not disclose the figure separately; that is a new revenue stream layered onto the subscription rather than a replacement for music.
McMillan sees operating margins around 14% on a trailing basis, a credible path to 20% by 2030, and potentially 30% beyond that. With earnings and cash flow compounding near 20%, rising buybacks, and no assumed multiple expansion, he believes rolling estimates forward can produce 25–35% upside.
11. Spotify is cleaner, but Netflix may have the longer runway
Walker pressed on Spotify’s roughly 40× earnings valuation against low-double-digit revenue growth, AI-enabled portability of listening histories, and Daniel Ek’s move from CEO to executive chair at the end of 2025. McMillan called AI a net positive but over-discussed, citing Spotify’s rights and clearances to create remixes; he will worry more when an AI song dominates the Hot 100.
On leadership, McMillan argued CEOs receive too much credit and blame, like quarterbacks, and Spotify is now a scaled engineering platform capable of being steered by a less visionary operator. Walker’s counterexample was the extreme right tail—Tom Brady, Patrick Mahomes, peak LeBron James, Mark Zuckerberg, or Elon Musk—where rare talent remains underpriced.
Netflix offers comparable low-double-digit revenue growth and stronger apparent value at roughly 18–20× earnings. McMillan sees low-to-mid-30% operating margins reaching 40%, high-teens-to-20% earnings growth, and a uniquely global service—besides YouTube—that keeps extracting more value from its existing library. Walker’s framing of the moat was that Netflix can price content over a potential audience he described as 1 billion users, versus smaller bases for rivals.
McMillan also sees Netflix picking off some of the best YouTube stars, sometimes through exclusive deals and sometimes nonexclusively, effectively using YouTube as a pilot season.
The AI disagreement remained unresolved. Walker sees rapid progress enabling low-labor original lookalike sitcoms within roughly two years; McMillan sees formulaic media as difficult to reproduce because templates do not guarantee the creative execution that provides “that last little 2% that makes it magic.” More immediately, Netflix’s roughly 19 million logged-in viewers for an Australia NFL game versus YouTube’s roughly 17 million free viewers for Brazil showed its ability to absorb television audiences and unlock sports advertising.
Spotify nevertheless wins McMillan’s near-term conviction because it faces fewer irrational competitors and has a cleaner glide path toward 30% margins. Netflix competes directly with permanent rival YouTube and irrationally persistent media companies, although over five years or more it could become an entertainment super-app, bundle rival services, take a cut, and perhaps earn a 30× multiple. Walker noted that the valuation comparison is imperfect because Spotify is net cash while Netflix has some leverage.
Full transcript
1. The quarterly media check-in
All right. Hello and welcome to yet another value podcast. I’m your host, Andrew Walker. With me today, I’m excited to have—I think it’s the third time—Simeon McMillan from Acred Interest. Simeon, how’s it going?
Great, Andrew. Great to be back. I look forward to making another great interview. I’m a friend of the show—or friend of the pod, whatever you want to call it. There’s always something interesting going on in media, so we’re never at a loss for topics.
Well, you stole that from me because I told you that right before we started recording.
I really enjoyed it. Once every 3 weeks, I get an email from a furious long on some media stock saying, “Look what Simeon said on this.” So, you’re making waves, and I’m super excited to talk with you.
I think we last talked at the end of Q2, toward the beginning of Q3. It’s now rapidly approaching Q4, the end of Q3, so we were just doing what we said we were going to do. People enjoy it, so we’re going to do our quarterly media check-in. I’ve been following Acred Interest, so I know you’ve got lots of thoughts.
I think the place you wanted to start was Spotify, but I’m super excited to talk about Nintendo. I’m going to pull out my host veto card and talk Nintendo, which I’m a 10 out of 10 excited to talk about, and then we can do Spotify, which I’m a 9 out of 10 excited to talk about, and some other stuff, if that works for you.
Sounds good.
2. Why Simeon is bearish on Nintendo
Great. So, Nintendo. I said you really ruffled people’s feathers. I think in August you published a bearish piece on Nintendo, and then you published another one after they held their big conference earlier this year that said, “Hey, I watched their conference, and it’s everything the bears said.” I know a lot of Nintendo bulls, and a lot of them were very upset with you.
Nintendo is a beloved company. They’re finally getting their media strategy together. Super Mario Galaxy 1 and 2 do great, the live-action Legend of Zelda movie is coming early next year, and people are bullish on Nintendo, the theme parks, and all of that. Why are you bearish on Nintendo?
Simply put, I’m bearish on Nintendo—or far less bullish than the average bull—because I think it’s an incredibly cyclical stock that has not been able to break out of its dependence on the hardware upgrade cycle.
That’s why I tell people I pride myself on my shorts. I went 6 for 6 on my short scorecard for the first half of the year. I’m not afraid to go against consensus. My average short was down over 30% on an absolute basis and more on a relative basis, so I’m not afraid to ruffle some feathers.
3. Remakes: is Ocarina of Time the oil well?
My main issue with Nintendo was that this is not a stock you can put away and forget about. A lot of bulls retroactively act like they bought the stock at the low. They say, “Look, it’s up a little bit off the low,” but it’s far below its high as of last year. You could say that stocks sometimes overshoot, and I get it, but the whole thesis was that they had a flywheel that was going to let them escape from the console cycle. My only observation in my latest piece is that the flywheel is not there.
If you want to buy it, I think you buy it when it’s down. You buy it going into major game releases. But to give you some more tangible information, what I’m always worried about is that they’ve done a better-than-expected job selling Switch 1 software this long into the cycle.
For me to really believe I could hold this for more than a year—and again, I’m not a day trader; I don’t get excited if I can just get a 20% pop, and then I don’t tell you when to sell—they need to sell more Switch 2 software. That’s how you bring the audience over to the next cycle, because eventually Switch 1 is going to run out of steam.
I had an article up last week coming out of the Nintendo Direct 9/9 event. It was a 2-day event, and a lot of bulls got excited because, on day 1, they presented the new Zelda game, which is amazing.
I think working in media has taught me to check my biases. The people most excited about it are millennials, or 40-year-old people who played the old game 20 years ago, because in the grand scheme of things, remakes only get so much juice.
Simply put, I’m very worried going into this holiday season, because typically the biggest time to sell consoles is during the holiday season. Now we’re going into Nintendo’s second Christmas without any more flagship titles.
To give your listeners or viewers a quick overview of the Nintendo ecosystem, in my mind their tier-one characters or titles are, in no particular order, Mario Kart; Mario, whatever Mario game of the cycle; Super Smash Bros.; The Legend of Zelda; and Pokémon. I’m sure I forgot a couple, which your readers will let me know.
At launch, they gave away a lot of copies of the new Mario Kart in the bundle, which they had never done before. That helped them sell Switch 2 consoles, because without that, I think sales would have been quite weak.
Now, at the Direct event, the biggest game they have going into Christmas is a Legend of Zelda remake. What the bulls are saying is that it’s not a problem because eventually they’ll make more flagship titles. But now we’re out into 2027. If you go into 2027, we have visibility on Pokémon coming in Q1, or in the spring. You don’t even have a date.
Maybe you hold Nintendo until then, but I can’t wait forever. Eventually I’m going to want to see more of these other games if I believe that Switch 2 is a viable alternative. Otherwise, they’re just elongating the life cycle of Switch 1, which doesn’t get me excited.
Can I pause you there? That’s a great summary. In your note, you’ve got 4 reasons, and I actually had in my notes that I wanted to go through the 4 things I hear from bulls all the time.
You’re hitting on the number-one thing I hear from bulls all the time: “The next remake is going to be huge.”
You know, the Star Fox remake earlier this year was huge. I remember a few years ago they got really bullish on a GoldenEye remake that was coming out, and this year it’s the Ocarina of Time remake. I always get confused because, on the one hand, the bulls will tell you, “Hey, this is the next Apple,” and then, on the other hand, they’ll say, “This new launch is coming up.”
But I think it’s interesting in 2 places, right? You rightly are saying, hey, this shows kind of the dearth of depth. I mean, if you’re buying a Switch, you’re doing it really for the exclusives. And if they’re not coming out with the exclusives, that isn’t driving hardware, and you’re looking over at the PlayStation 5 over there and saying, “Oh, GTA 6.” That’s really interesting.
But on the other hand, look, you and I both follow media. If Avengers comes out with a remake of Avengers: Endgame that’s digitally enhanced and in IMAX, it’ll sell a couple of tickets, but nobody cares. Isn’t part of the story, hey, this Ocarina of Time might be behind Grand Theft Auto? It might be a top-5-selling game in the world at the end of this year. It’s a freaking remake.
And the thing that Buffett used to say about Disney in the ’60s is that they’re like an oil well where the oil seeps in, right? Every 10 years they re-release Cinderella or whatever it is. Isn’t this just kind of—I think the more bullish case to make would be, hey, what you guys are pointing out is that this is the oil well where the seepage comes back in. Who else could re-release a game and have a bestseller? Isn’t that speaking to the brand and the legacy and all that sort of stuff on the bullish side?
I think it does, and that’s why the stock has bounced up a little bit from the lows. There is life there for the bulls to point to, and I won’t deny that. But using the Marvel or Disney example that you gave, over the last 20 or 25 years, Disney did a lot of acquisitions to refresh its IP. They’re not just doing Mickey Mouse Part 10. Along the way, they added new franchises and started the cycle over again.
Everyone’s hyped about Spider-Man, and in a couple of years, honestly, I think no one will care about this because the X-Men will be here, and they can milk that for a long time. But we just came out of a period where people said Marvel was dead and getting tired. They had to bring back Robert Downey Jr. and lots of other actors out of retirement.
I hear everyone. I think the game is going to do well. I think that, again, I could see it doing well between now and the spring with the Pokémon release, but I just want to see more, or at least some release dates.
The other thing that’s a little bit different, I think, from other forms of media is that inflation is everywhere, and everyone knows that. But the inflation in the costs for the parts is noticeable. This is also the first time that Nintendo has raised the prices of a new console so early in its life cycle. You’re going to lose some demand there.
4. Memory costs and the first mid-cycle price hike
Can I just—so this is actually my next question. I’ll just pause and explain. What you’re talking about is inflation in memory, right? The Switch 2 and all these consoles have a lot of memory, and if anyone’s been following the stock of Micron, memory is in high demand, and they had to—I think they were eating something like $150 of cost in memory.
So what you’re referring to is, hey, Nintendo had to either eat it on margins or increase costs, and they’re in a tough spot where the cost of the hardware is going way up. So that hits them in multiple spots. I just want to pause so people know what inflation you’re talking about.
Yes, no, that’s absolutely right. What I’m afraid of is that, in order to make this transition, this might work a little bit longer because people love the Switch 1 games, and it’ll take them a little bit further. I recognize that this is not the absolute alpha short, but consoles are supposed to get less expensive over time, typically. In the past cycle, you had it get a lot less expensive. They came out with a Switch Lite, I believe.
By raising prices so early, Nintendo implicitly told you that they don’t see memory costs coming down anytime soon. So I’m not expecting a Switch 2 Lite anytime soon. I don’t know how long they could bridge this gap.
I was also very disappointed, and I just want to point out, because I hear bulls point this out, that the stock started tanking during the presentation. A lot of people were disappointed by what they saw. I wasn’t the only one. Not that you should always listen to angry people on the internet, but a lot of the fan reviewers in the YouTube and gamer communities, who aren’t even talking about the stock, were like, “That’s it.”
In addition to remakes, they also had a lot of third-party games that were already released on other systems or were years old. So I think that puts even more pressure on Nintendo to deliver on this Legend of Zelda remake.
Yes, they have the movie coming out. They do have the movie coming out. I want to point out to people that not all media franchises are created equal. Zelda doesn’t have the same resonance with young kids as Mario does. It just doesn’t.
I’m not calling the box office a bust. I’m not. I think the movie will probably do well, but this isn’t the same as a Super Mario Galaxy movie. I just really worry that no one’s buying a Switch 2 to play Resident Evil because the graphics are better. They’re not. We’ll see how long they can play this game. Pokémon needs to come out as soon as possible.
5. The attach rate and the Mario Kart bundle
You know, it’s funny you mentioned Zelda because when I think of Zelda—and I think I’ve played pretty much—not all of them, that would be a lie, but I’ve played the major releases, right? You don’t play Zelda for the story. Yes, it’s cool, but you play it for the beautiful music and the innovative game mechanics.
I guess you could say you don’t really play Mario for the story either, but it is a little surprising that a movie—I don’t know. I think I saw a headline the other day that Crazy Taxi is getting turned into a movie, and if there’s a game without any story, it would be Crazy Taxi.
6. The bull rebuttals, and subscriber growth that isn't
Let me go to the next thing that I think is interesting. You really hammer home the declining attach rate, and I think a lot of bulls would have a lot of different arguments against you on the declining attach rate. For my listeners who, for some reason, haven’t read your article or aren’t as familiar, can you describe what the attach rate is and then why you are so worried about it?
Sure. The attach rate, simply put, is the number of games that are purchased with a new system. There are different ways to estimate this, and we can get into that. It’s a measure of enthusiasm or interest. How excited are people for this new system?
Out of the gate, the attach rate—I don’t have my exact numbers in front of me—was significantly lower for the Switch 2 than it was for the Switch 1 when it came out in the prior cycle. Then I argued that it’s even worse than it looks because they bundled a free game along with it.
The game that they bundled is, I think, actually their top-selling franchise of all time, believe it or not. So they’re giving away their Mario Kart game. It’s like giving away a free ticket to Avengers with it.
The attach rate is going to grow over time. I’ll concede that as you have fewer bundles in the sample, but I look at the top-selling titles, and the longer these Switch 1 games keep dominating the sales, the more it worries me. It just does. So I’m curious: What are the bulls saying as a rebuttal to the attach rate? What have you heard?
I think it would be both, right? If you look at a PlayStation, you’re not seeing last year’s or 2 years ago’s games as the top sellers. It’s all the new releases. That might change with Grand Theft Auto because I bet that’s going to be the top seller for a while.
But I think they would say, “Hey, again, you’re seeing that these games carry much longer lives.” And the fact that the Switch 1 games are selling so well—I think they say, hey, you have the evidence that people are upgrading from the Switch 1 to Switch 2. They still have the Switch 1 library, so they don’t need as much of an attach rate.
I think they’re saying, hey, these are the signs of a healthy ecosystem. And then the last thing I think they push back on is Nintendo Switch Online, the subscription service. I can’t remember off the top of my head.
Yes.
Nintendo Switch Online. They say, hey, maybe one of the reasons the attach rate isn’t so high is because people are signing up for Nintendo Switch Online, so they’re playing the back catalog. And yes, that’s decreasing the attach rate, but that’s actually great. We’re growing this huge subscription business that makes people very sticky.
I think they would argue, “Hey, you’re kind of missing the forest for the trees.” I’m not saying this is right or wrong. I’m presenting a lot of different things and spreading peanut butter on a lot of different arguments. I think they would say, “Hey, what really matters is that this is the fastest-selling system of all time.”
There is pretty much no argument there. Maybe it's not quite as good as the bulls hope. Nintendo did—and you pointed out in your article—they cut down production targets a lot. It's still the fastest-selling system of all time, but it's not the greatest of the greatest of all time. So, I think that's where they would push back on you.
One point I wanted to make about Nintendo Switch Online—because let's talk about that—is something that bulls haven't talked about, which maybe I put too low in my article: Nintendo discloses the number of subscribers to Nintendo Switch Online, and it's not growing. I think that's sort of an elephant in the room that I rarely hear brought up, and I actually had to triple-check it several times. I think it's been fairly flat, constant, over the last couple of years.
7. Netflix as a value stock
I'd feel differently if I saw the number of Nintendo Switch Online subscribers growing, but it's not. They're milking more and more out of a strong fan base. I just wonder how long they have to go.
That is really—I did not realize that. I would have just assumed that it was growing quite rapidly.
8. Nintendo margins, and whether 40% is real
I put that way too low in the article. I should have kicked it up. For all you readers and listeners, you can go back and read the article, and you can see the number of subscribers is not growing. It's actually quite stunning what they're doing.
Let me go to margins real quickly, because I think this loops into a lot of the things we've talked about. You noted the declining margins that Nintendo has right now. Look, that's expected. When you launch a hardware cycle, you're going to sell a lot of hardware. Hardware is a lot lower margin than software.
In general, as we talked about earlier, this is the way it always worked until memory prices went crazy: when you first sell the console, it's much less profitable than a console that's 5 years old because technology gets better, memory costs come down, everything comes down. So, it's not surprising that this year their margins went down.
I think where you push back against bulls a lot is you're saying, “Hey, margins are in for a rough time.” And I know bulls who think this becomes a fully subscription service, à la Apple with the App Store. I've seen people talking about 40% to 50% operating margins for this business in the long, long term, which I think is kind of crazy. But they're saying this goes fully asset-light and fully recurring revenue, all that sort of stuff.
You think margins are going to be low? They're probably not going to stay this low forever, but you're saying, “Hey, all the IP things people are talking about, if you look at the lines, they haven't really grown, so the margin is lower.” Let's just talk about margins real quick.
Sure. I absolutely agree that margins are going to expand as we have more software, and that is not in dispute. The best case for margins would probably be if they never release another console.
That's the funny thing: that would be the best case, but then eventually—actually, that might be great for the stock because then they could just sell to Comcast and be a normal company.
If they're going to continue the exclusives, they have to release a console at some point.
Exactly.
So, I feel margins are more of a timing issue. Maybe I'm a little off this year or next year, but it's going to ebb and flow. I think I've actually been spending more time offline talking to gaming experts. And again, setting aside the fandom, Nintendo is not known for strong online play. They're not known for multiplayer games, not known for online games.
The multiplayer online games are mostly going into the back catalog. I thought it was interesting that Nintendo tried to get some goodwill with the fans by having a tariff discount. Instead of giving money back to consumers, they were putting a lot of their back catalog on sale. And I'm like, okay, that's what every game developer does.
So, I think online is actually one of Nintendo's weaknesses. And if that is what the bulls are hoping for, I think they might be a little concerned, because most of Nintendo's multiplayer games are really meant for you to play with friends who are in your living room. It's very different from the PlayStation, Xbox, and PC world, where you go and connect to the worldwide web.
9. Should Nintendo have sold itself?
Yes, the games have online elements; I won't doubt that. But if online is what we're hoping for, then I go back to the Nintendo Switch Online subscribers, which have been stuck in place. Show me some momentum there, and then I'll concede the point. Otherwise, you're just draining more out of the cow until Pokémon comes.
No, it's a great point. I think a lot of the arguments come down to—people can probably hear, and I think people can probably hear from you too—I'm a huge Nintendo fan. I've played a lot of Zelda games and Mario Party with my kids; my Mario Party skills have gotten really rusty. I can't wait until my kids are old enough to play, but since I was a teenager, I've played Mario Party nonstop and Mario Kart.
But I find them to be very Japanese. They obviously should have sold the company years ago if this was being run for shareholders' benefit, right? In 2020 and 2021 in particular, they would have commanded a huge premium. People tell you Comcast says all the time they'd love to buy them. The online play—they don't have mobile—it's just a great niche company, but I worry that they're very Japanese, and it's kind of the legacy of the Japanese company that gets run for a dream. Shareholders are there, but it's not ever going to maximize value. I worry about all that.
Yes. And one point that I forgot for margins, which is related: in theory, if the media, the IP, the movies, the theme parks—if they were bigger, if there were more of them—I could say, “Yeah, you've got that great licensing revenue,” which is typically higher margin coming through the P&L.
But I point out in my piece that they don't have that much. For them to really go in on this whole connected universe, I need to see 2 to 3 movies a year, every year—not just every time they feel like it. I don't need just a handful of theme parks; I need a dozen. I need way more TV shows.
You mentioned Crazy Taxi. It's actually a Sega property. And Sega—not to jump ahead, excuse me, I don't want to mess up your flow—but Netflix announced sometime this week that they did a deal with Sega to create new Sonic shows, new shows around Sega IP. In a perfect world, I think that's what Nintendo should do. I think they should do an arm's-length deal.
Look, that's exactly it.
10. IP, movies and parks, with Pokemon as the template
In the long run. But they want to go it alone. Yeah, go ahead.
I think we had a slight connectivity issue. I'm completely with you there. I know they've got this high standard and everything, but I don't understand. I've always said you've got to be raising the next generation. My daughter—we don't even let her watch TV shows—and she loves Mickey Mouse, and there's no Mario. Maybe she's a little too young for that, but they need to be plastering Netflix with Mario shows freaking everywhere. Or The Legend of Zelda for 7- to 10-year-olds, or on Disney+. It should be on Disney. Exactly.
The fact that they don't do that is a problem. Millennials like you and me are going to love that forever, but the next generation—if you neglect them, all of a sudden they're 22 and they don't have this nostalgia, and it falls apart. So, I actually think they're running a strategy that, even though they say they're long-term and they're maximizing, they're maximizing the fans from the '90s. I think that's going to be troubling in the long term for them. I think you were spot on.
It's like when you said it earlier: millennials are really excited about this Ocarina of Time remake. I don't think 13-year-olds are that excited for it. So, I have one last question for you about Nintendo, unless there's anything else you want to hit there.
Just one last question. Pokémon, I think it's really interesting.
They own 35% of Pokémon. I think it's about 35%. There are different theories about a nesting doll of different things, but that is one area where I think people have argued for a lot of upside, and that's one brand that's really managed to stay super relevant. So, I'd love to know: how do you think about Pokémon as it relates to Nintendo?
I don't want to just be saying yes back and forth. I kind of see it similarly. I think this is a brand that I wish they owned 100% of. If they owned 100% of it, then it could move the stock a whole lot more, and I'd feel a whole lot better about it.
But they sold, I believe, Pokémon Go to a gaming company that I think is owned by a Saudi conglomerate. You were talking about the nesting dolls or different ownership rights and whatnot. I think another thing about Pokémon that we want to keep in mind is that the game sales are still very strong, yes, but a lot of Pokémon is consumed outside of the game in ways that Nintendo doesn't capture, like the toys and the cards.
I would probably argue that the younger generations are actually more into the collectible cards, which, by the way, I never thought Pokémon cards would still be a thing, along with collectibles.
So, more power to them. I didn't see that coming, but yeah, I think it's—go ahead. Yeah.
On Pokémon, I would argue that the fact that Nintendo has a big stake but doesn't own it—what you're saying, that's the sign of really good brand health, right? They don't have to monetize it only through games; the ecosystem is always growing.
I actually think when you look at Pokémon, it's hugely valuable for Nintendo. It might be worth—say, it could be worth—not all of it, but Nintendo's a $70 billion company, and Pokémon is worth a ton. But I think the fact that Nintendo doesn't own it shows you what a Mario or a Zelda should be. That's how they should be growing. It's not just games monetization.
I understand Mario might not be perfect for trading cards, but there should be more licensing and all this sort of stuff. Pokémon does that, and I think the fact that they're a little more entrepreneurial speaks to the brand strength. It's not all through the games, but I think it's showing you what an ideal Nintendo would be to me.
I agree. It's the ideal, and I hope to see them do more of that—do more of that with their brands. But right now, it's too lumpy for me to hold it for 2 years.
11. Spotify: the mea culpa
Well, I appreciate you humoring me and talking Nintendo for 30 minutes. Yes, I can. I love talking Nintendo, and I could talk about it for 4 hours. Someone needs to have me on a podcast to talk for 4 hours about Nintendo.
But let's turn to what you want to talk about and a company that I follow pretty closely, and that's Spotify. I'll just give my bias: I've always regretted that in 2021 and 2022, I did a lot of work on Spotify when the stock was probably in the $150s, and I ended up passing. The reason I always liked it was that I spend about 12 hours a day just listening to Spotify in the background. I listen to all my podcasts. It's a very sticky subscription that's on the front of my phone.
I passed because, at the time, Bill Ackman was taking Universal Music Group public through PSTH and all this sort of stuff. I was also doing work on the music labels, and all the music-label bulls I talked to were saying, “Spotify—we're going to run over Spotify in the long term.” I disagreed, but I was having that imposter syndrome where I thought, “If everybody who studies music labels tells me Spotify is in trouble…”
Anyway, Spotify has done great since then. You are quite bullish on it, and I think it's your strongest-conviction long right now. So, as we end 2026, with the stock price about $550 the last I checked, why are you so bullish on Spotify right now?
Sure. It's uploaded; it'll be fresh at the top of my page. I wanted to do a sort of mea culpa because I missed Spotify, probably from 2024, call it. The article is called “Spotify Is a Quiet Compounder That I Will Never Underestimate Again,” and very early in the article, I alluded to how I mistakenly thought that the record labels were just going to hold Spotify hostage for their margin.
I don't want to pick on any one investor because a lot of investors had the same sort of theories and thesis on Universal Music. I like to bring my experiences working in the corporate world into my writing. I've done corporate FP&A far longer than I did any sort of professional investing, and I also worked in radio. I was turned off from Spotify, first, because I thought they'd never get right with the labels. The labels would keep the margins down.
I also mistakenly thought that the Apple tax meant they were going to have to pay a chunk of their subscriptions to other people, and they eased up on that. Something else I missed—and this was a big turning point—was that Spotify made peace with the record labels in a series of deal renegotiations.
We don't have to get into all the twists and turns, but between 2024 and 2025, Spotify set up new deals with all the record labels in which, for the first time, I would argue everyone was incentivized to be on the same side. What I totally missed was that the way the licensing agreement is set up, Spotify's royalty rate actually goes down the faster they grow. The more subscribers they get, the lower the rate goes. It's a basket of metrics, not just any one metric, but they're incentivized to grow, and that helps the whole ecosystem.
So that's good.
12. The label deals, and who actually won
It also allows you there, Simeon. Sure. I had a slightly different takeaway than you there. I think you said everybody's incentivized, and when I read that, I had a different read. Again, I should have been long it too—both of us missed it—but I kind of read it as the label saying this was Spotify winning.
The label was saying, “You know, the Spotify argument was always, ‘Hey, we have all the listeners. If one label cuts us off, we'll shift everyone.’ And we're going into audiobooks and podcasts, so we can push people out.” I read it as not just everyone being on the same side, but Spotify saying to the labels, “Hey, we own you now, right? We're increasingly less reliant on you.” And guess what? In the next round of renegotiations, I bet Spotify takes more.
So I almost didn't read it as bringing people onto the same side. It's our way or the highway.
That's the more blunt version of it. I think maybe this is the corporate side of me that likes to soften the language a little bit.
You ran it through your PR department and made sure nobody came out looking bad, even if somebody lost.
13. Advertising, and payola by another name
Exactly. You want to present it as a win-win, even if it isn't. But, yeah, it is Spotify winning because they got better terms than they certainly had before.
Another thing that I overlooked for Spotify—and I think even earlier this year or late last year I said no to it again—was that Spotify has not been as successful as I think some people had hoped in growing its advertising revenue, for lots of reasons. Again, coming from radio, I'm biased against audio as an advertising format. I think video is just better. I think video is always going to have more share and a higher CPM, so I was like, “I don't know.”
I was turned off again when I saw the advertising tier. Usually, in most media businesses—in the history of media, without pontificating too much—you typically have far more advertising revenue than subscription revenue because people like free. If you look at the numbers, I lay this out in my piece, the mix of advertising revenue as a percentage of total revenue has actually been falling, whereas some people hoped it would be growing.
The more I dug into it, I said, “Well, actually, advertising is underperforming.” In my risk section, I talk about how I do wish it were stronger and I do want it to be stronger, but the mix of advertising has been falling relative to the pie because the premium segment has been growing at a mid-teens CAGR for much longer than I ever thought it would.
You mentioned how they were bringing on audiobooks, and that's great. I underestimated—or overlooked—the fact that Spotify got a lot more price discipline when it came to podcasts. Podcasts used to be burning money. They were candidly giving out way too many of these trophy deals.
I think they're still waiting on Prince Harry and Meghan to deliver on some of those Spotify contracts.
Right, right, 100%. The only one that probably paid for itself was Joe Rogan, but a whole lot of the other ones didn't. They pulled back, so podcasting went from being a money pit to a positive one.
Audiobooks are great, and what they've also pointed out is that with audiobooks, they're now able to sell additional hours to people. I'm quoting management here, so caveats—they don't break it out.
You got it.
Exactly. But they said that, very quickly, they had what I think is a $100 million run-rate business just from extra audiobook credits.
I think something else I underestimated is that part of the way Spotify was able to make more money was not necessarily by making more money, but by getting a lower royalty rate from the labels, who would lower the rate in exchange for marketing and promotion.
Now, what does marketing and promotion mean in digital? In radio, a lot of people think there's a term for your listeners called payola.
It's a very old word.
Yeah, so look it up if you've never heard of it. It's the allegation that the record label, or whoever, is paying the DJ or paying the station to get more spins. A lot of people think that happens, but it's illegal.
In the digital world, it's called marketing. We can get you more placement in the playlists and other digital nudges. Technically, you don't have to hit the button when you get to the playlist—you could skip it—but it's a huge boost. Now that everything is more algorithmic, it's amazing for them.
14. What AI does to Spotify
It's one of the reasons I was bullish on Spotify back in 2021 and 2022. What's the best space in media for advertising? It's the Netflix homepage, right? Well, Netflix doesn't let you advertise there. What's a really good space for advertising in music? It's the Spotify homepage, right? You open up Spotify, and you've got the labels right there.
And if they just start—
They don't even need to do it. Wink wink: if they start putting you on the front page—or, you know, UMG, you're giving us some problems. All right, we're going to have Warner in all of our playlists and everything.
They've got a lot of ability to shift really quickly and without people even knowing they're doing it. I'm describing something a little more sinister, but all of that, I thought, was real-ish. I mentioned Netflix, which I'm foreshadowing for our next thing, but let me go through the 3 things I wanted to talk to you about Spotify—just 3 high-level things.
I think the first is that we live in the AI world. You have to ask: How do you think AI is impacting Spotify? I know some bears who think AI is negative for them in 2 ways. Number 1, the rise of AI music floods a lot of the platform. Or number 2, one of the reasons Spotify is so sticky is that they know all the music I like, right? The high school music I listen to, the Taylor Swift music—they've got all that history.
That makes it really difficult for me to go to Apple Music unless I can just have an AI go read all that and import it to wherever I want. I can seek the cheapest music player all the time, using AI to backfill my content. Those are the 2 negatives.
I think you had a positive take on how they use AI for algorithmic recommendations and to increase playing time, but I'll just pause there. What do you think about AI for Spotify?
I think it is a net positive for them, but I think it also probably gets more oxygen than it deserves on both sides. I won't repeat all the points that you made in the interest of time. The smart algorithms—you have a network effect. The longer you've been on it, the smarter it gets; it knows you.
I think another benefit that Spotify has, which is underappreciated, is that because they have the rights and clearance to all the songs and the publishing and whatever, they can do remixes and other sorts of AI creations that another company can't do unless they want to face another large lawsuit.
I'm not—I never want to be dismissive of anyone's opinion, but I actually think AI music is probably the least of their concerns. For easy listening or whatnot, okay, but until I see an AI song really dominate the Hot 100 charts, I'm a little skeptical about that.
15. 40x earnings: priced for perfection?
It's coming. But I actually think it's a bull case because AI isn't represented by a label, right? So if they're just filling it and you're just auto-listening to stuff, I think the profits go up.
Let me turn to the second case.
Actually, I'll start here. The other interesting thing here is that Spotify trades for about—let's call it—40 times earnings. You can push back if you want, but about 40 times EPS, right?
Spotify is growing revenue at, I'm just looking at, low double digits. I think it's fair to say they're growing revenue at low double digits. A low-double-digit grower with 40 times EPS, I would say, is not crazy pricey, but that's on the pricier side. You're really starting to price this at an annuity rate at that point.
For a business that—I know they've held off the Apple Music competition, I know they've held off the YouTube Music competition, and I know they've held off the Amazon Music competition—but for a business that has a lot of very well-funded competitors making this a core part of their bundle, 40 times earnings on double-digit revenue growth seems priced for perfection.
My main pushback to you is: Hey, man, you've got a 1-category thing with a lot of well-funded competitors, and the market is treating this like a category winner. It's priced pretty richly. How would you respond to that?
Sure. Not to get off topic, but this also reminds me a little bit of some of the knocks I've heard about Apple when people from time to time get bearish on Apple and say, “Oh, well, it's growing at a quote-unquote low rate.”
Here's what I would say. A big crux of my piece, and something else I love about Spotify and why I call it a quiet compounder, is that most people—not you, obviously—stop right there when they say, “Oh, we're just growing at 10% or 11% a year on revenue.” But this margin expansion that is well underway is actually leading to earnings growth, probably in the high teens.
I can see them growing actual earnings at maybe a 20% CAGR over the next couple of years because, again, for a long time their operating margins were incredibly thin. On an LTM basis, I think it might be about 14% or so. Right now, in the mid-teens, they have a line of sight to 20% margins between now and 2030, which I think is achievable just on the run rate that they're at. Because of everything we said before, I think beyond that it could go to 30%.
I think this is a situation where, yes, you're always going to get a higher multiple than what some people might be comfortable with because it is an oligopoly. I would argue, too, that Spotify doesn't get enough credit for fending off Apple, YouTube Music, and Amazon Music. They're never going to slay the beast because those companies are always going to be there, but they're the clear number 1. I'm most worried about YouTube.
I think that a low-30s multiple for something that's compounding earnings at 20% year over year in an oligopoly—you have to look at the earnings growth and the cash flow growth. They're upping the buyback. I think the cash returns are higher than people think.
In my case, I'm not arguing for any margin expansion. I'm just saying, let's roll the multiple forward a couple more years, and you could see 25% to 35% upside easily. Then beyond that, if they keep growing these premium subscriptions and lowering their costs, this could be a winner. If anything, I think it even shows how low Netflix's multiple could be.
16. Daniel Ek steps back, and are CEOs overrated
Well, we're going to talk about Netflix in 1 second. [Laughter] Let me do my last Spotify question, then we'll go to Netflix, because I think this is also relevant to Netflix.
Daniel Ek stepped down as CEO at the end of 2025 and handed it off to co-CEOs, and Ek is now the executive chairman. I can't think of many places where the founder-visionary CEO stepped back. He's executive chairman, not fully stepped back, but I think you need look no further than Netflix.
Reed Hastings stepped away. It's been a little bit of a rocky tenure for Netflix since Reed Hastings stepped away. Anytime that happens, you have to look and say, “Hey, did the visionary say, ‘Oh, the next couple of years are going to be a little bit rocky. Maybe I step back, collect my riches, dial it back a little bit, and let somebody else handle the rocky period?’”
I think that would be the last interesting pushback I would have on Spotify.
And that's fair. There's a little bit of adverse selection because you're right: The CEO knows more than we do. Sometimes they want to ride off into a high—
Allegedly.
Allegedly, allegedly. Not to mix metaphors, but a lot of people were more skeptical of Apple after Steve Jobs left, and Tim Cook is not a creative guy at all.
I think CEOs are overrated in general, in my personal opinion, having worked for a lot of them. They're like quarterbacks. I think they get too much of the credit and too much of the blame. The current CEO comes from a tech background, an engineering background. This is very much an engineering product.
What they're trying to do—they aren't making music; they're building a platform. They're trying to get the best economics out of it. I think this is a trend that is far bigger than the executive suite. I don't really read too much into the management transition, and I think the proof has been in the pudding with the margin expansion. The margins in the past 3 years have exploded without Daniel Ek there, and I think they can keep going higher.
On this “CEOs are overrated” point, I think I would push back on you this way. I agree that most CEOs are overrated, but let's use quarterbacks, so we'll stick with quarterbacks.
I think it's one of those things where there's such a thick right tail. Most of them are overrated, but if you have 1 of the top 3 guys—and I'll just use Patrick Mahomes and Tom Brady—why are they holding up the trophy year after year? If you have the top guy, I think those guys are actually underrated, and they're always underpaid.
If we went to the NBA, the max contract—if you have LeBron at his absolute peak, because of the max contract, he's way undervalued. I think Mahomes and Brady have been way undervalued because they also value winning and consistency and all this sort of stuff.
I don't know if Daniel Ek—I think building this business from nothing, he's a great founder. He started this great company. I don't know if he was an A+++ multibillion-dollar CEO. I kind of think he was, but I would agree with you: Most CEOs are overrated. But a Daniel Ek or, as much as I disagree with a lot of his stuff, an Elon Musk—we could probably find 3 or 4.
The right tail is just so thick for those 1,000x engineers who use tech leverage. I would say those guys have been and are still underrated. Mark Zuckerberg, who I know you’ve done a lot of Meta, I would probably put him in that category. I mean, I know people are hit or miss based on the spending, but that would be the one area to discriminate.
Unless you have anything else on Spotify, I’d love to talk Netflix real quick. I guess the only concluding thought I would have on Spotify is that I think another benefit Spotify got over the last 5 years to decade is that they actually have a lot fewer streaming competitors than they used to. I think it’s a little bit hard to play Monday-morning quarterback in terms of how Daniel Ek would have navigated the renegotiation of these rights deals 5 years ago.
Because back then—and people might forget this—there were a lot more streaming alternatives. You had Tidal, you had Deezer, and so many of these up-and-coming upstarts have fallen by the wayside. I think for a while it really looked like, “Oh, this is a copycat platform,” but now they have the scale to compete with the best of the best. You can do new things, and maybe this is the point where a B-level CEO can steer the ship because the foundation is that strong.
Let’s go to Netflix.
I think people are pretty curious. As soon as they did the Warner Bros. deal, you heard skeptics saying, “Hey, what are they seeing in their numbers that makes them feel the need to do their first big acquisition of all time?” We’ve talked about that. I don’t think we need to beat them up for a deal that isn’t happening and is 6 months in the past at this point. But they’ve also been shifting their KPIs down around a little bit, all this sort of stuff.
The stock was down after their most recent earnings report, so it’s been a rough ride. I think you have a different view, and I’ve heard from a lot of bulls. Bill Ackman, a prominent bull, sold it in the doldrums of 2022, and he’s back in now. I know people who have followed it the whole time. I think a lot of bulls say, “Hey, yes, it’s not going at our top-end, A-plus stream of what we wanted, but the business is performing really well. This is the cheapest it’s been in a while. They think it’s really interesting. They’ve won the streaming war.”
I’d just love to turn it over to you. As we sit here on September 16, with the stock in the high 700s, how do you think about Netflix on a go-forward basis?
I think this is going to be—well, first of all, I think it was very impressive for Ackman at Pershing Square to change their mind publicly and in a big way, because I know a lot of people who wouldn’t go back to a stock that they were so publicly wrong about.
People dunk on him. It’s like, “Hey, I’m going to make numbers. He bought the stock at 200 and sold it at 150, and this is all not adjusted for splits, and now he’s buying it at 500. What a loser.” I’m like, “Hey, man, do you know how hard it is?” I come on this podcast all the time and say the stock chart is up and to the right, and I feel I missed it.
Whether he’s right or wrong, the mental flexibility to say, “Oh, I missed something that 3x’d in my face, but I think the opportunity’s there”—that is incredible mental flexibility. I think everyone should wish they had that ability.
So, yeah, I think he was smart to change his mind. Candidly, I’ve had a difficult time discussing the Netflix, Warner Bros., and Paramount wars, because I think a lot of people have been rooting for Paramount as a proxy for how they feel about this administration. If we want to be hard on any CEO about making uneconomic decisions, I think Paramount’s right there. Their UFC deals don’t make any sense. A lot of their deals don’t make any sense.
Their margins aren’t expanding, and yet, by every objective metric that people obsess over for Netflix, I never see that same smoke for Paramount. I feel like I see a lot of cheerleading where the only standard of success is, “Did you get the deal done?” But we’re not here to talk about Paramount.
I think Netflix is a value stock, and they’re just going to have to execute. Too many people’s minds are still anchored in the old world. In media, a lot of people are biased toward, “Did I like the show I just watched?” But when you are a global streaming service—and I remind people that Netflix is the only truly global streaming service other than YouTube—you can’t necessarily judge it purely based on how many Emmys they’ve won, which is still a lot, or the hot show, because that comes and goes.
I don’t know if Netflix is going to change people’s minds. It reminds me of when people a couple of years ago were saying, “Apple doesn’t innovate anymore. When’s the last time they made a product that blew you away?” Well, guess what? Sometimes they don’t have to. They changed the metrics, and the answer they gave was that they wanted to focus on profitability. People got mad. Tough cookies. Suck it up, because it’s the truth.
If the margins keep expanding like they are—and I think the operating margins at Netflix are in the low to mid-30s, with a path to 40%—people can stay mad. I’m not going to sit here and say that a company growing revenue in the low double digits and expanding margins isn’t attractive. If you actually look at earnings growth, you’re talking about high teens to 20% earnings growth.
As I said on the last podcast, not to belabor this point, Netflix has gotten incredibly efficient at milking more and more out of the content library that they have. They’re less concerned about winning the war for cool, which ultimately will send you out of business. It’s really cool that Paramount+ got UFC, but nobody in their right mind could argue that it was actually a good monetization decision.
So, let the stock stay low. Let people stay mad, and they’ll keep expanding their margins. The P/E of 18 will go down to 17, and then it’ll rerate. Just to warn your listeners and viewers, I said I think eventually they’ll probably go after another big acquisition.
There’s nothing bad about acquisitions. I think it’s absurd that they’re anchoring their biases to what someone said 3 years ago. Three years ago, we said we weren’t going to do any acquisitions. Well, yeah, it’s 5 years later, we killed all the competition, and we have a billion user hours. We’re going to have to buy things from the graveyard of corpses of media companies out there.
The one thing I would say about Netflix, too, is watch out. Netflix is picking off some of the best YouTube stars, sometimes for exclusive deals and sometimes for nonexclusive deals. They’re using YouTube sort of as their pilot season.
People look for a certain perception. I think boring and uncool is the perception here, and I think Netflix can keep winning on that.
17. AI generated content and the Netflix moat
Let me start with the most interesting thing—well, not the most interesting, but an interesting thing: the rise of AI videos. For a long time, I thought the Netflix moat for value investors was, as you said, its global distribution. When they price any type of content, they price it over 1 billion users. Everyone else prices it over 500 million, 100 million, or 200 million, so the price per piece of content is way lower.
They’ve got all these advantages. They can make their own hits. Just think about what they did for Suits, or choose your legacy media property that flamed out on legacy media and became a huge hit on Netflix. That was all the rage, right?
Nobody could match them in scale. The rise of AI-generated content goes in 2 ways. First, go listen to Meta’s call and hear them talk about how improved AI algorithms are causing people to spend 10% more time on Instagram and stuff. AI is getting better at generating short-form content that keeps you looped over and over again. The old Netflix argument was, “Our biggest competition is not HBO; it is sleep,” or whatever. Short-form content is really getting up there.
Second, the rise of AI content makes it easier to make TV shows and algorithmically generated AI shows. Netflix might have a lot of AI-generated competition. We talked a little bit about Spotify, but I think AI is perhaps more pertinent to Netflix, both on the short-form-content side and on the generated-content side. How are you thinking about AI as it relates to Netflix?
Sure. When I think about AI-generated content, the biggest place I see it is on YouTube, mostly in the children’s verticals. I see a lot of creators who use AI to skirt or just flat-out break copyright law and take clips of shows or movies.
I wish I could show you my YouTube algorithm, because you said “children,” but they know: “Show Andrew an old Superman clip. Show Andrew a clip from Billions. Show Andrew a clip from Scrubs, and he’s always going to watch it.”
Oh yeah, that looks pretty interesting. Just cut those videos up.
100%. And for children, for example, they know, “Let’s just use Sonic the Hedgehog” and an outside party. So they have clips, again skirting the laws, from all the movies and whatnot. Whether or not Paramount is getting money for that is a topic for another day. But then they have truly AI slop videos where it’s like, “Oh, it’s trailers from movies that don’t exist.”
Yep.
Particularly in the kids’ ones. I see a lot of that, and kids don’t know any better. So they think, “Yeah, Sonic 4’s coming out.” I’m far less worried about that for your listeners who don’t have Sonic in the background. Part 4 is coming out in 2027.
I’m actually way less concerned about AI content overall. I need to see some use cases or some examples of actual AI shows that get people going before I care too much about it. I see the novelty of it. I mean—
Can I just pause you there real quick? I definitely hear you, but AI is a lot about where the puck is going, not where it is. And I think of that old video from—it was only like 2 years ago—where it was Will Smith eating the spaghetti. Do you remember that?
Right. And for viewers who don’t know it, they had AI generate a video of Will Smith eating spaghetti, and Will Smith had 8 fingers on each hand while eating a cheeseburger. It looked almost like a SpongeBob SquarePants cartoon. It was cartoonishly bad, but that was only 2 years ago. You fast-forward to today, and if you did it, you could have a photorealistic video that would look like Will Smith eating spaghetti, right?
And I hear you. You haven’t really seen AI content take off yet, but it can generate pretty damn good clips. I saw one the other day; it had AI generate a sitcom, and it was not entertaining. But if you said, “Hey, this was a sitcom,” you’d be like, “Well, there are some weird jumps, but, yeah, it kind of makes sense.”
I’m not talking about where it is today, but if I run that for 2 years—and especially maybe you have 1 writer monitoring the AI and saying, “This doesn’t make sense; change this”—I could definitely see a world where, in 2 years, you could have AI generate a Friends knockoff: 6 attractive friends who are just hanging out and cracking jokes, with a real writer monitoring and creating a show. I could see that, and that feels like a pretty damn big risk to me.
It could happen. But look, I think that if these things are going to take off, first of all, the actors who are already on edge are going to step in. The actors’ unions and the guilds are going to step in to make sure that they get a piece of that, because they’re not going to let their likenesses be used without some sort of compensation.
Isn’t that the worry, though? Yeah, if I was doing a Friends—just like, “Hey, here’s extra episodes”—absolutely, I’m paying Jennifer Anderson, right? But isn’t the worry that I’m going to make a lookalike of Jennifer Anderson? I’m not going to call it Friends. I’m going to call it Acquaintances, and it’s going to be 6 lookalikes, and it’s just going to be 1 writer having AI generate the entire thing.
It’s like, “Hey, who are you going to sue? I’m not using Jennifer Aniston. I’m just using a random blonde there.” There are no likenesses. I guess I’m worried about the internet getting filled with that slop.
I think that, again, I think this is more of a YouTube phenomenon, in which case I think this is a chapter, maybe a subchapter, of the bigger fight between Netflix and YouTube. And I would just say, in the history of media, in every medium, I think people have thought it’s more formulaic than it actually is.
In every period of media, you take the top show or genre, and they’ve had knockoffs of it that have tried to capture the zeitgeist. Again, I keep going back to children’s entertainment because with children’s entertainment, I think you get more cycles because new kids are always being born who don’t have memory of what happened before.
And so, if you look at all the Disney hits—let’s just use Disney—there are YouTube videos about this. Disney had A Bug’s Life, and then there was Antz from DreamWorks. DreamWorks went forward.
It’s always going to be there. Yeah.
18. NFL on Netflix vs YouTube
So, yeah. I think media is tough. Media is tough.
Go ahead.
It is very hard. And look, Dick Wolf—all the Dick Wolf shows, Law & Order, all the Chicago shows—they are very formulaic. But as you’re saying, it seems formulaic, but there’s a reason that NBC is paying Dick a heck of a lot of money to be basically all of their primetime schedule, and they’re not paying you and me. You and me could probably make a formula, but we’re missing that last little 2% that makes it magic. So I am with you there.
Let me quickly go to—I just, I don’t know if this is asking you for a comment, but the NFL is back. And one thing that I thought was really interesting, and that I think speaks to Netflix’s moat, is that last year the NFL’s opening game was in Brazil and it was on YouTube, and it got about 17 million viewers. This year it was in Australia and it was on Netflix, and it got about 19 million viewers.
Now, that’s a little bit apples to oranges because I think the Brazil game was on a Friday, which is where all TV ratings go to die, and the Netflix game was on a Thursday. But on the other hand, to watch Netflix, you need to log in, and YouTube was completely free. The YouTube game had Patrick Mahomes, probably the biggest star in the NFL. The Australia game had some good teams, but it did not have that.
And I know a lot of people said YouTube played games with their ratings number. So, I guess what I’m saying is, it’s pretty wild that Netflix can beat or match YouTube’s ratings while requiring a login. We can talk about the NFL being king; we can talk about Netflix, but I just thought that was a real bullish point: hey, they’ve got a lot of power here, and they can drive a lot of things. If you want to do 60 seconds on that.
The threat from AI, I think, just reminds people that Netflix still has the ability to take a whole lot of money away from television. They’re still not done feasting off the decaying corpse of the linear television market and taking share from all their competitors. And if they can take sports, which they’re showing that they can, they can live off that for a long time because it opens them up to new ad categories that they had before, like advertising and sponsorship.
So I’m more bullish because I think Netflix can become more like TV than I am worried about Netflix losing necessarily to short-form. Although we need to watch the whole thing.
19. Gun to your head: Spotify or Netflix?
All right, we are way past an hour, but I’d love to wrap it up with just this question. We talked about Spotify earlier, and I said, “Hey, I’m alluding to Netflix.” When I read your articles, it seems like Spotify is your top pick. It seems like you’re the most bullish on Spotify, and you can correct me if I’m wrong, but when I look at Netflix, I hear you a little bit more passionate, I would say, about Netflix in this conversation.
At a high level, I look at Netflix and say, “Hey, Spotify is low-double-digit growth. Netflix is about low-double-digit growth. Spotify has this margin-expansion story. Netflix has the same margin-expansion story.” While Spotify trades at about 40 times price-to-earnings, Netflix trades at about 20 times price-to-earnings.
Now, Netflix has a little leverage on it. Spotify is net cash, so it’s a little apples to oranges. They’re different businesses, but at a high level, I look at it and say, “Hey, if I was just looking at quantitative metrics, Netflix is half the multiple.” It seems to me like Simeon is equally, if not more, bullish on Netflix. Why would Netflix not be the top pick versus Spotify? I know you’re bullish on both of them, but if I’m saying—
Right.
Gun to your head, choose between your children. It feels like it should be Netflix over Spotify.
I mean, if you want to look over the next maybe 5 years or more, I could see that argument. I think that I’m more bullish on—I have more conviction in—Spotify because I think that they have a lot of the same financial metrics and the same story, with less competition.
Because Netflix, I think a problem with Netflix is that a lot of Netflix’s alpha is going to have to come from earnings because there are so many opinions out there in media that there’s always some new upstart. There’s always going to be another media competitor around the corner. And honestly, I think that, gun to my head, I wouldn’t be surprised if 10 years from now Netflix is trading at 30 times because they’ve become more of an entertainment super app.
I think some of the evolution of Netflix is going to have to take a little bit longer. Whereas I sort of rate my conviction in terms of not just upside and downside, but what could go wrong, and I see Spotify as having a much better glide path to 30% than I do Netflix.
But this is going to make a lot of people mad: when Netflix starts bundling other people’s services and starts selling access to the other streamers and taking a cut, people are going to say, “Oh no, you’re changing strategy.” But I think Netflix has a lot more levers that they can pull. I think it’s just going to take a little bit longer because, again, media is fun, and in fun businesses you have irrational competitors that are going to stay there a lot longer.
Paramount should not be in the conversation. They're only there because the CEO has a father who's one of the richest people on the planet. This should have been game over a long time ago if there was any other one.
20. Wrap, and the student tier
And then you have YouTube as well. I think that Netflix probably deserves a lower multiple than Spotify because Netflix is more of a direct competitor to YouTube, and YouTube's never going away. But no, I like them both. I think Spotify is a little bit cleaner, and I don't want to have egg in my face right now. I think the future's bright for both of them. You sort of just have to follow the earnings, not the noise. We're past hits. It's about money. If they can get more NFL games, watch out.
Great. Well, let's wrap it up there. Simeon McMillan, I can't say I read everything you publish because, boy, do you publish a lot, but I follow the big ones a lot. And look, you do stuff other than—I focus on media because I love chatting about media, but I know you've been following the big Uber insider buys and covering Uber, lots of tech stuff. So I really appreciate you coming on. Looking forward to having you again in the future, and we'll chat soon.
Thank you very much, guys. And to all the students out there, I'm going to be having more student-focused content on how to pitch a stock, how to pitch a short, and giving you more versions of some of my best pitches, so you can get ready for your investment clubs, your internship interviews, and your job interviews. I'll be doing more of that going forward.
I'm laughing because—how to pitch a stock. I mean, you're stepping on my toes, and how to pitch a short. The answer is just don't.
Me putting my money where my mouth is.
Oh, sorry. You cut out for a second there. I'm laughing because—how to pitch a stock. I mean, you're stepping on my toes, and how to pitch a short. The answer is just don't.
I loved your video, and it was great. I want to talk more about some of the components of it, like how do you get very precise? How do you talk about incremental growth and not just topline growth? So there's no right flavor. If you haven't watched Andrew's video, it's actually fantastic. It's a great overview, and there's no one way to do it. Just focus on the company that you love, and you'll do the work and tell the story.
I appreciate it, man. All right, well, hey, this has been great. Looking forward to our Q4 checkup, and we will go from there. Simeon, thanks so much.
Talk soon.
A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.