A hedge fund manager known for making provocative, if not always accurate, stock picks pounded the table on Netflix (NFLX) Monday, prompting the troubled company's stock to rocket 3% yesterday. Enough said.
But I can't resist saying a bit more.
Whitney Tilson, a hedge-fund manager well known (along with other things) for his losing bet on Netflix, likes Netflix. What's more, he likes Netflix because it is supposedly the next Amazon (AMZN).
In trading, saying one company is the next Amazon (or Apple (AAPL) or IBM (IBM) or McDonald's (MCD) for that matter) often amounts to famous last words. Companies are singular. Great companies even more so.
Moreover, Tilson has a ten-year time frame. As in: a decade. Specifically, Tilson shrugged off Netflix's gaping lack of profits by flapping his gums about Amazon. In other words, Amazon invested in its expansion in the early 2000s and its stock eventually did well, therefore Netflix's will do the same.
You got that?
If the reasoning sounds thin, it's only because it is.
There is a comic value to anyone taking a ten-year time frame with a technology as new and prone to change as streaming video. How much history do you have to go on? After all, Netflix is barely 10 years old itself. And more to the point, faces competition from Verizon (VZ), Amazon, Cablevision (CVC), Comcast (CMCSA), Time Warner (TWX), Apple and God-knows which start-ups that are only now getting up to speed. Netflix has essentially been all alone until recently. How will they react to competition? Looking long-term, that's an open sore of a question.
Remember too, that when Amazon started spending on infrastructure at the turn of the century, they were coming off of spectacular top line growth. Revenues rose from $1.64 billion to $2.76 billion from 1999 to 2000. By sad comparison, Netflix is looking at high single digit sales growth this quarter and next. The risk of spending to build themselves up is, as a result, steep. They lack Amazon's wiggle room.
All the while, of course, Amazon sold real life goods, if over the Internet. There was risk of change there, but the risk of emerging technologies and competitors knows no bounds here. If you're time frame is ten years with Netflix, you are setting yourself up for a mistake, big time.
Tilson also said he is encouraged that Netflix has a higher subscriber base but lower valuation than Hulu, which probably says more about Hulu's overvaluation than it does about Netflix. He also holds out the chance of a takeover, the final hope of someone stuck in the muck of a desperate stock position.
Desperate indeed. Netflix is expected to report a 4 cent September quarter, down from a $1.16 in last year's September quarter. That's obviously no grand showing and don't even take any consolation that it's at least a profit. Analysts are expecting losses for the next two quarters.
Whitney was speaking at the Value Investing Congress in New York. He's a provocative speaker. Listen up. Just don't automatically follow him. In fact, in the case of Netflix, you might do well to do the exact opposite.