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Adam Levine-Weinberg  

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  • Despite The Stock's Rally, HP Should Be Split Up [View article]
    Not to be too harsh, but the stock market disagrees with your assessment of HP. You can interpret that how you want. My personal take is that the stock market can be very wrong for a long time... and that this is the case for AMZN (and was the case for HPQ a couple of years ago when the stock was down in the teens).

    AMZN's FCF was a little over $2 billion last year -- a small fraction of HP's FCF. Plus, over half of Amazon's FCF was the result of stock-based compensation. If the employees were paid in cash based on the stock price and then the company issued new shares, it would have the same net effect without showing up in free cash flow.

    Anyway, I digress. There's really no evidence that HP's printing business is in decline. There is some price deflation, but HP's COGS is declining faster than its revenue. Pretax income for that business was up solidly last year.

    Obviously, people have different investing styles. You seem to go for growth at all costs. I don't think it's a problem that HP is not growing and not likely to grow much in the future. I'd prefer to have the company buy back 10% of its float every year and boost EPS that way rather than investing billions of dollars in long-shot R&D projects. When HP has tried to get in on the latest fad, that's where it has run into trouble.

    It's worth noting that about 70% of HP's revenue comes from PCs, printing, and low-margin outsourcing services. None of these businesses should need very much R&D spending. If you separate out those businesses and look at the software and enterprise hardware business units separately, R&D is much higher as a percentage of revenue than the company average.
    Mar 1, 2014. 09:21 PM | Likes Like |Link to Comment
  • Here's How The Comcast And Netflix Deal Is Structured, With Data And Numbers [View article]
    I wouldn't go quite that far. However, I would think it was a strategic mistake if Comcast gave Netflix better service at a lower price than what it was paying to third parties. My expectation is that Netflix would be paying perhaps $5-$10 million extra beyond what it would have paid to move the same video traffic over third-party networks. That seems like a reasonable price for Netflix to pay for significantly better service to about 1/4 of U.S. broadband subscribers. But that dollar range is just a guesstimate -- I don't have any inside sources!

    TWC's value depends to a large extent on how fast its video subscriber base erodes. Comcast would be better off letting the deal get blocked if the alternative is to empower a disruptive competitor (Netflix) so that TWC loses video subs even faster. Just my two cents.
    Mar 1, 2014. 01:28 PM | 2 Likes Like |Link to Comment
  • Here's How The Comcast And Netflix Deal Is Structured, With Data And Numbers [View article]
    Maybe, but that would require some serious short-term blinders. Spend billions of dollars to buy a cable company, then help your disruptive competitor lower its costs and improve its service quality in order to more quickly cannibalize the cable customers you just bought at a premium? Doesn't make much sense!
    Mar 1, 2014. 09:21 AM | 1 Like Like |Link to Comment
  • Here's How The Comcast And Netflix Deal Is Structured, With Data And Numbers [View article]

    I think you make a lot of good points here. But I want to push back on two specific things.

    First of all, peak Netflix traffic is probably higher than "Google, Microsoft, Yahoo, AOL, Amazon" combined. So why wouldn't Netflix be paying as much as those content providers combined, given that pricing is based on a per Mbps rate? I can't imagine that Comcast would give Netflix enough of a volume discount to more than offset the fact that it's delivering more content than all of the others put together. That would suggest that the $30-$60 million figure you threw out is also a good guesstimate of what Netflix is paying.

    Second, why is Netflix using Cogent or Level 3 at all if it can get guaranteed better service at a lower cost through a paid peering arrangement with ISPs? It doesn't make sense to me that Netflix wouldn't jump at the opportunity to pay 10% or 20% more to guarantee better service for its customers. And if that's the case, then why would Comcast offer this service at a price less than what Netflix would otherwise be paying to Cogent or other third parties?

    Feb 28, 2014. 04:50 PM | 2 Likes Like |Link to Comment
  • Netflix Pushes Closer To The Edge [View article]
    Well, I guess it's time to test the theory that analysts will downgrade Netflix on valuation. Netflix is now past $450 and about 20% above the mean and median price targets, so you would think that would imply underperform ratings from most of Wall Street.

    However, over the past year, analysts have been more inclined to raise their price targets to catch up with Netflix stock rather than downgrading. It will be interesting to see how this plays out. Rationality hasn't made frequent appearances in the last few years as Netflix went from $300 to $50 to $450.

    For example, I was pretty surprised to see Netflix add another $1.3 billion to its market cap this week on the news that it's paying Comcast for peering. IMO, this is probably more expensive than going through an intermediary like Cogent... why wouldn't Comcast charge for better service?
    Feb 25, 2014. 06:30 PM | Likes Like |Link to Comment
  • Is Netflix Really Worth Over $10 Billion More Than Time Warner Inc.'s HBO? [View article]
    I would love to see an analysis of the cable vs. internet-only business models for HBO. Unfortunately, I don't have the industry contacts to do a good job with it myself.

    It seems to me like HBO would have already dumped cable if the case for doing so was clear-cut. However, while HBO is sharing revenue, it also gets significant benefits. Most importantly, Netflix spends over $1 billion a year on non-content related stuff. Marketing is the big one, but there's also content delivery, and then the cost of building and maintaining a high-traffic web property.

    On top of that, cable operators often have 3 months or 6 months of free HBO as an enticement to get people to sign up. I would guess that HBO subsidizes that offer in some way, but HBO is still probably getting some amount of money from those subscriptions which is coming out of the cable company's marketing budget.

    Having a dedicated pipeline is also worth something. Plenty of people in the U.S. (myself included) don't have an internet connection that's suitable for full-HD streaming.

    I think these factors all make the benefits of the direct-to-consumer model less clear cut. That said, I agree that the market will probably move that way eventually. It just might take a while for HBO to get there.
    Feb 15, 2014. 02:05 PM | Likes Like |Link to Comment
  • Is Netflix Really Worth Over $10 Billion More Than Time Warner Inc.'s HBO? [View article]
    As a practical matter, you need broadband internet at home to use Netflix. Pay-TV subscribers (combining cable, satellite, and telco) still outnumber broadband subscribers in the U.S. It's about 100 million pay-TV households vs. 90 million broadband households.
    Feb 15, 2014. 09:45 AM | 1 Like Like |Link to Comment
  • Netflix Content Expenses Continue To Skyrocket [View article]
    They don't say anything about individual markets, but the fact is that the contribution loss went from $105 million in Q4 2012 to $57 million in Q4 2013 despite adding a market (the Netherlands), albeit a small market. The Q1 projection is $42 million, and Netflix projections have tended to the conservative side recently.

    If it really looked like some markets were never going to be profitable on a fully allocated basis, Netflix could always just wind them down. I don't think it will need to, though; it just might take a while to build up a sub base in Latin America.
    Feb 13, 2014. 11:35 PM | Likes Like |Link to Comment
  • Netflix Content Expenses Continue To Skyrocket [View article]
    I wouldn't short cable operators. Even if cable TV goes downhill, these companies tend to offer the fastest internet, which means that they can make a killing providing the pipeline for Netflix and similar services.
    Feb 13, 2014. 05:06 PM | Likes Like |Link to Comment
  • Netflix Content Expenses Continue To Skyrocket [View article]
    One of my biggest difficulties in trying to value NFLX is the price issue. I just don't have a good sense of how many people would eventually subscribe at $8/month, and how many would continue to subscribe if the price went to $10, and especially if it went beyond that to $12 or $15/month.

    I don't have Netflix. I don't really "get" Netflix. I'm paying $45/month for Comcast and feel much happier with that than with paying $8/month for Netflix. (Maybe I'll change my tune when the promotional period ends and the price goes up to $80 or $90!) Some of it may be taste: I don't really like most of the "edgy" shows that Netflix, HBO, Showtime, etc. seem to specialize in.

    But the real issue is that I want the full cable package for sports and for some current season TV shows that I want to watch. Once I have that, I have so much content on my hands that the marginal value of Netflix is very low. (I also have Prime, which I do use a fair amount.)

    I watched and liked House of Cards, but at most I might sign up for a month at some point to watch Season 2 and then quit again. $8 for a year of Netflix content might be worth it for me, but I'm much happier paying $45 for cable than $8 for Netflix. The stuff on cable is what I actually want to watch.
    Feb 13, 2014. 05:05 PM | 1 Like Like |Link to Comment
  • Netflix Content Expenses Continue To Skyrocket [View article]
    I agree that the other expenses will continue to grow as well. But I don't think they will continue to grow at 15%-20% long-term. The advantage of being a low-margin business today is that you don't need to get much margin improvement to see EPS rise fivefold or more. A little bit of leverage can go a long way -- albeit probably not enough to support a $400+ stock price long-term.

    As for the DVD segment, it's obviously declining, but not that quickly. Assuming it goes to zero by the end of the decade, that loss would be a fraction of the likely increase in domestic contribution profit. On top of that, international isn't going to post big losses long-term.

    I don't expect international to reach breakeven on a full-year basis until 2017 or 2018. But that's 100% because of expansion start-up costs. The current markets appear to be on track to reach breakeven by Q4 of this year, or Q1 2015 at the latest.
    Feb 13, 2014. 04:44 PM | Likes Like |Link to Comment
  • Netflix Content Expenses Continue To Skyrocket [View article]
    I'm also bearish on Netflix but I think you've gone a bit too far. Netflix grew pre-tax earnings by about $200 million last year, and there's no reason to believe it can't do roughly the same for the next several years. On the domestic side, the dollar growth in revenue was about double the dollar growth in COGS. Overall, domestic streaming COGS grew 19% last year and I'd expect roughly similar growth for the next several years, but that's pretty manageable given the recent growth rate.

    Also, I would agree that most Netflix subs would not look as kindly on a doubling or tripling of the subscription price as as Brian Bleifeld. However, a price increase to $9.99 in a couple of years probably wouldn't lead to mass cancellations, and it could add $1 billion or more to revenue in a single year, depending on when it occurs.

    I think there's a decent chance that a slowdown in growth and rising costs of international expansion send the stock down to the $200 level later this year or in 2015. There would have to be a really stunning collapse for the stock to fall below $100, though. Just my two cents...
    Feb 13, 2014. 12:59 PM | 1 Like Like |Link to Comment
  • Nvidia's Tegra Business Collapses [View article]
    I think you are barking up the wrong tree. The worst is behind NVIDIA in terms of Tegra declines. NVIDIA is guiding to a 10% year-over-year revenue increase this quarter, up from 3% growth in Q4. It's possible that this could still incorporate a small Tegra decline, but it's also possible that Tegra will return to growth.

    As for Q2, the comparison is ridiculously easy. I would be shocked to see anything other than triple digit growth in Tegra sales: Tegra Processor segment sales were just over $50 million in Q2 last year, which was down 70% from the prior year.

    To me, it seems like you're not taking into account the size of the Tegra opportunity. By 2020, smartphone unit sales will probably hit 2 billion worldwide. I'd assume that 50%-60% will be totally commoditized sub-$200 phones, and maybe another 25% would be mid-high end Apple and Samsung phones. But the other 15%-25% of the market could be a $10 billion sales opportunity. If NVIDIA gets 20% of that, it's a really significant number. Add in tablets, gaming devices, cars, etc. and you have a recipe for a very successful business.
    Feb 13, 2014. 12:37 PM | 4 Likes Like |Link to Comment
  • Amazon: More Likely To Plummet Than To Soar [View article]
    To the author: FYI, Amazon reported earnings after the market closed yesterday. Amazon stock rose 5% during the day mainly because the stock market had a very good day. Today's move will be indicative of how people feel about AMZN's results/guidance.
    Jan 31, 2014. 08:33 AM | 1 Like Like |Link to Comment
  • How Promising Is The 2014 Outlook For Netflix? A Look In Numbers [View article]
    Comcast had an 8.6% increase in program expenses last year and is projecting 9%-10% this year. It's on p. 5 of the earnings call transcript:

    Granted part of that is due to sports, which is an area where Netflix doesn't participate. Still, I think the general point holds that content costs have been rising faster than inflation. I saw a story in the WSJ a couple of months ago about how the surge in demand for scripted entertainment is leading to shortages of talent (I think primarily writers).

    As for Netflix's below market-rate content deals, I will admit that I can't quantify it. 3-4 year content licensing terms seem to be quite common, though, so I think this particular headwind won't dissipate until 2015 or even 2016. The Q2 2013 shareholder letter talked about rising content prices (bottom of p.2 into p. 3) and stated that Netflix's long-term content deals would mitigate this inflation. However, that really just means the inflation will creep in over a few years as the long-term deals expire.

    Jan 30, 2014. 12:42 PM | Likes Like |Link to Comment