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Adam Levine-Weinberg  

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  • 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
  • How Promising Is The 2014 Outlook For Netflix? A Look In Numbers [View article]
    Quick correction: Time Warner (TWX) and Time Warner Cable (TWC) split up almost 5 years ago. I think HBO will eventually make HBO GO a standalone service but the problem may be the nature of the existing contracts with cable operators. Also, the cable operators basically do the marketing for HBO in a profit sharing type of arrangement which might cause some duplication of effort if HBO started marketing HBO GO separately. But eventually an internet-only offering seems inevitable.
    Jan 29, 2014. 07:09 PM | Likes Like |Link to Comment
  • How Promising Is The 2014 Outlook For Netflix? A Look In Numbers [View article]
    Hey Ace... good to see you here!

    I take your point that "no way" is too strong, although it does seem like an incredibly unlikely prospect to me. While it would still take 4 years to get to 60 million, growth isn't likely to go from 6 million to 0 at once. So to keep growing in 2017 at 6M+ subs you'd have to believe Netflix's ultimate market opportunity is near the very high end of its 60M-90M long-term goal. So I guess there's a way, but I just see it as very far-fetched.

    Where I'd really disagree with you is on the content spend. "Legacy" pay-TV providers are encountering 10% annual inflation in content costs. Beyond that, Netflix is trying to move from non-exclusive to exclusive deals (which are obviously more expensive) and original content (which is even more expensive). To top it off, Netflix negotiated some of its current deals when streaming was just getting off the ground and there was no serious competition. So as those deals get renegotiated the cost goes up more than normal inflation.

    Roll that all together, and $400M of incremental content spending gets you maybe 1 House of Cards and $350M in higher payments to content owners for the same stuff. If you look at 2013, my personal evaluation of Netflix's content (admittedly subjective) is that it didn't get much better, if at all. There was a lot of great content added like House of Cards and Orange is the New Black, but also a lot of great content removed, e.g. Downton Abbey, Viacom kids content, etc.
    Jan 29, 2014. 07:03 PM | Likes Like |Link to Comment
  • How Promising Is The 2014 Outlook For Netflix? A Look In Numbers [View article]
    Look, it's certainly possible that Netflix will keep rolling as you imply and the trend lines you are projecting will turn out to be accurate. But I think if you were to backtest your methodology for the 2009-2012 period, for example, you would find that the trendlines were broken radically almost overnight.

    I don't expect anything like the Qwikster debacle in the next few years, but I do think that Netflix's year-over-year profit gains will peak in the next couple of quarters and profit growth will be slower (on average) going forward, primarily due to the cost of international expansion.
    Jan 29, 2014. 02:11 PM | Likes Like |Link to Comment
  • How Promising Is The 2014 Outlook For Netflix? A Look In Numbers [View article]
    Didn't you say in the article that Netflix would hit EPS of $5.50 this year? The average analyst estimate is just a tad over $4... although that still might be a stretch if Netflix really does launch in France and Germany this fall.
    Jan 29, 2014. 02:05 PM | Likes Like |Link to Comment
  • How Promising Is The 2014 Outlook For Netflix? A Look In Numbers [View article]
    Bill, I don't think France/Germany will launch in Q2. The summer months are weaker for sub growth in general due to seasonality, so it doesn't make sense to start incurring fixed content costs when it will be hard to sign up a lot of subs quickly. If you look at prior international country launches, they have all come between September and January. That's why I think the new markets will launch in September or October.
    Jan 29, 2014. 02:02 PM | Likes Like |Link to Comment
  • How Promising Is The 2014 Outlook For Netflix? A Look In Numbers [View article]
    I don't think it's right to just project a line (or curve) out based on recent trends. Even if domestic saturation doesn't hit in 2014, it will hit in 2015 or 2016. There's no way that Netflix can keep adding 6-7 million domestic subs for more than a couple of additional years. At the same time, content costs will continue to rise, so contribution margins will peak, maybe around 30% or a tad higher. (That's the figure Netflix has thrown out, anyway.)

    I think Netflix would earn a small profit in the international segment in 2015 IF it doesn't add any new markets before then. However, reading the tea leaves it seems very likely that Netflix will launch in France and Germany later this year. Based on the size of those markets and the level of losses Netflix has absorbed in other new markets, I believe that Netflix will lose about $600 million combined over two years in those markets before they reach breakeven.

    Depending on the launch timing (I'm guessing September or October), the majority of those losses will fall into 2015. That won't quite bring the international loss back to 2012 levels, but I'd expect it to stay around the 2013 level.

    To look at it another way, if Netflix's profitability is surging as you say with no major deviation from the recent trend, why is the company raising $400 million in debt when it already has over $1 billion in the bank?
    Jan 29, 2014. 11:34 AM | 1 Like Like |Link to Comment
  • United Airlines' Path To Much Higher Profits [View article]
    OK, I think this is really where we differ on the airline industry. I think that airline margins today are close to where they will remain long term. I would say that airlines have not a decade, but a year (or maybe two) of margin growth left. After that, margins will start to contract.

    The airline industry will never earn 25% margins. It is way too easy to buy or lease an airplane and add flights. Delta and United may be fine with earning double digit margins with no growth, but LCCs and ULCCs are willing to sacrifice a bit of margin for higher growth. As capacity comes in, ticket prices will come down until margins are back at an equilibrium point where everybody starts cutting back on expansion plans.

    Did you see that United mechanics were picketing this week to demand that their pensions be restored? They stated that the airline got rid of the pension plan when it was in trouble almost 10 years ago, but promised to restore it when good times returned. To be honest, the only thing holding back labor unions is that the NLRB will hardly ever sanction a strike because the airlines are too big and so having even one out of commission would damage the economy.
    Nov 26, 2013. 11:10 AM | Likes Like |Link to Comment
  • Netflix: Asking Key Questions For 2014 [View article]
    Bohsie: you need to explain why any cable network would do this. Why would you give your content to another company so it can charge a 30%-50% markup for putting in on the internet? All of these cable companies already put their content on the internet. If demand for live streaming TV over the internet becomes significant, the top companies could just form a joint venture (or use Hulu, which already is a joint venture between 3 of the biggest players) and go direct to consumer.

    The reason why the networks sell to cable, satellite, and telecom companies is because those companies bring a large, guaranteed check, and provide a delivery mechanism. Netflix doesn't do either of those things. Why give a cut to a middleman if there's no technological or infrastructural barrier to selling directly to end users?

    Just look at the trouble that Intel had with setting up its over the top TV service. It reportedly had great technology, and no success in garnering content.
    Nov 22, 2013. 09:54 PM | 1 Like Like |Link to Comment
  • United Airlines' Path To Much Higher Profits [View article]
    Oh, I also wanted to add a bit of color on fleet replacement. I did notice your statement near the end of the article about how everybody's updating their fleets. This is a case in point in why I think United has the wrong strategy.

    Delta and United are both replacing domestic 757-200s with 737-900ERs right now. The 737 is a much more fuel-efficient plane than the 757, so swapping these out makes a lot of sense. United got started earlier, but I think it still has about 60 on order in the next few years, and then it will move to the MAX after that. Meanwhile, Delta just took the first of 100 737-900ERs in late September.

    Delta's domestic 757s were configured with 174-184 seats, and its new 737s have 180 seats, so the company is getting lower fuel consumption without giving up capacity. By contrast, United had 182 seats on its domestic 757s, but it's only putting 167 seats on the 737s it is taking.

    The difference is that Delta has a few rows of premium economy seating, whereas United has this vast E+ section. United is effectively ceding a permanent 6%-7% unit cost disadvantage in order to generate more ancillary revenue. The ancillary revenue is growing, but it's nowhere near enough to compensate for such a massive gap in unit cost.
    Nov 22, 2013. 03:13 PM | Likes Like |Link to Comment