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Adam Levine-Weinberg

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  • Netflix: Asking Key Questions For 2014 [View article]
    Bill,

    I'm not sure P/S is a very helpful way to think about Netflix, because it's meaningless outside the context of the company's long-term margin profile. If you think Netflix will be earning 30% or 40% pretax margins someday, then an internet company P/S is reasonable. But if you think pretax margin is going to be more like 15%, then it can't really be grouped with those higher margin companies.

    I think the price increase sensitivity analysis is a good exercise, but I think you vastly underestimate the impact of raising prices. The last time Netflix reported churn, it was losing about 5% of its customers each month! I'm sure churn is much lower now: maybe 3%? (It would be great if NFLX would start disclosing this again.) If Netflix loses 3% of its membership base every month under normal conditions, would it really lose just 5% more in total after raising prices by $2/month, or 25%?

    I think a better way to think about it is that a price increase would increase churn, which would then gradually come back to normal over time. Suppose NFLX increases prices starting Jan. 1. In Q1 churn might be up by 200 bps to 5%, and then decline 50 bps each quarter, coming back to 3% by Q1 2015. With a starting member base of 33 million, you'd have 5 million additional cancellations over the course of the year. So at the end of the year, you've given up 15% of your subscriber base in order to charge the rest 25% more.

    Then you have to think about the 55-60 million broadband households in the U.S. that don't have Netflix. By definition, these people aren't willing to pay $8/month, so at $10/month they will be even harder to win over. The end result is that you get a quick bump in revenue and earnings, but higher churn and lower new subscriber acquisition... i.e. much slower growth.

    I think that's why Netflix's management has been so opposed to raising prices. A price increase on Jan. 1 could probably take Netflix from $2 of EPS this year to $6-7 next year. But subscriber growth would fall off so much that Netflix could be a $200 stock (or less) when all is said and done.

    Adam
    Nov 18 10:43 AM | 2 Likes Like |Link to Comment
  • US Airways Investors Hoping For Merger Bailout May Be Disappointed [View article]
    I don't know about timeframe, but I agree that a settlement is the most likely outcome, with AA/US giving up slots and gates at National and not much else.

    I wouldn't be all that surprised to see LCC stock rally if the merger is approved. However, I think the stock is already trading for at least fair value, if not more. $40 seems highly unlikely, not just in 2014, but for the next several years. That would put AAG's market cap at nearly $30 billion, well ahead of where Delta sits -- and AAG is starting from a worse position in terms of profitability and has more execution risk.

    Here are just a few of the challenges AAG will face, aside from the normal integration issues: 1) big increase in transcon competition from JetBlue's "Mint" product, 2) Big increase in Southwest's capacity in Dallas by 2015 (particularly in major markets like NYC, DC, LA, SF, Chicago, etc.) due to repeal of Wright Amendment, 3) fare wars at DCA depending on how many slots are divested, 4) over-reliance on 50 seat and smaller aircraft as Delta quickly upgauges to lower CASM aircraft; 5) Delta-Virgin joint venture makes London-NY more competitive.

    There will obviously be some revenue synergies from the bigger network and labor cost increases should be fully offset by other cost savings. But I still expect pretax earnings per share of the merged entity to be below what LCC is currently making, at least for the next few years.

    On top of that, American has a crazy fleet growth plan that creates fairly significant risks later this decade.

    Adam
    Oct 27 06:21 PM | Likes Like |Link to Comment
  • Short Netflix After Q3 Results: Fair Value $70 Per Share, 80% Downside Potential [View article]
    Great comment! It's too easy to just plug and chug with numbers that try to describe long-term growth. FCF could quite conceivably expand by several orders of magnitude in the next 5-10 years.

    However, while your subscriber target seems very achievable, I am skeptical that content costs will "only" grow to $6 billion by 2020. Just looking at the "cost of revenue" in the two streaming segments, it appears that Netflix is on pace to spend $2.5 billion-$2.6 billion globally on content. That's growing at 25%-30% annually! Even if the cost increases slow to a CAGR of 18%, content cost will hit $8 billion by 2020. That seems like a much more likely scenario.
    Oct 22 07:25 AM | 7 Likes Like |Link to Comment
  • Apple Earnings And Guidance - Why I Think It Will Beat Analysts' Estimates [View article]
    This is an interesting analysis: definitely a great exercise to go through everything product by product. There are a few things that seem not quite right, though. I don't know where you are getting your iPhone ASP, but it seems way too low. If you divide Q4FY12 iPhone and related revenue by unit shipments, it works out to $637. (Even stripping out the related revenue, I can't get to the <$580 number you have in the ASP chart.)

    I wouldn't expect the ASP number to move very much. While there's been a gradual migration towards the lower-priced models, this is offset by the fact that Apple shipped a lot more new generation iPhones this year than last year. (I.e. opening weekend was 9 million this year vs. 5 million last year.) Since ASPs always jump when a new model is introduced, that should offset most or all of the secular decline.

    Lastly, I can't imagine that Mac revenue actually declined sequentially last quarter. Last year, Mac revenue jumped more than 30% sequentially due to back to school. Alternatively, if you look at the IDC data, Mac unit sales may have dropped 11% year over year in the U.S. If that's representative of the world, it would imply revenue close to $6 billion: more than $1 billion over your estimate.

    All in all, I think iPhone unit sales will be a little below your guess, with iPhone ASPs well above your guess and Mac revenue also higher. I think there's a good chance Apple will beat its guidance for revenue AND gross margin. But we'll see soon enough.
    Oct 18 09:43 AM | Likes Like |Link to Comment
  • United adds some new high-profile routes [View news story]
    Delta's a much stronger company than United. This is just a terrible strategy on United's part -- the company might do better to retrench and work to rebuild its relationship with key customers. Fighting for market share with Delta in the latter's core markets will not end well for United.
    Oct 8 12:08 PM | Likes Like |Link to Comment
  • How To Profit From Tesla, Amazon And Netflix Stock Exuberance [View article]
    This seems like an excessively risky strategy given how far these stocks have already run-up. With options being this expensive, I think investors are better off making a call on how the stock is going to do than punting and betting on a big move either way.

    If you really don't have a strong opinion on whether these stocks are going to perform well or not, you probably shouldn't be trading them. There's plenty of other opportunities out there. Just my opinion.
    Oct 7 12:32 PM | 2 Likes Like |Link to Comment
  • Is HP Ready For A Move Lower? [View article]
    Bill: I agree with the other commenters that this analysis is too focused on the PC business, which I would estimate as constituting roughly 5% of HP's value (so if you write it off entirely, the stock might be worth $1.25 less). Even the PC segment might not be as bad as things seem right now. Windows XP support ends next April, and I think there will be some last minute buying this fall and winter by enterprises that have been delaying their upgrades.

    Printing is probably declining, but at a fairly slow rate. Not everything can be read on an iPad. (Funny example: person in the airport security lane in front of me this week had trouble getting through the checkpoint b/c you're supposed to show your boarding pass. He had his on his smartphone which was going through the X-ray machine!) In the meantime, the printing business generates tons of cash, and margins are expanding for a variety of reasons related to mix and component costs.

    I think the other businesses will probably continue as they have been. It's also worth noting that HP is way ahead of peers in terms of cutting costs to match the new revenue environment. Over the LTM, HP has cut at least 15K jobs as part of its restructuring, and I believe another big wave of reductions hits at the end of this month.

    Despite the rising stock price, I think expectations for HP are much lower than for the other companies you mentioned (corroborated by the lower analyst targets and lower P/E ratio). Revenue declines are just par for the course for HP, and if revenue seems to be stabilizing going into 2014, I think the stock will break through $30.
    Aug 20 01:11 AM | 1 Like Like |Link to Comment
  • Netflix Earnings: Good Not Enough For Premium Stock [View article]
    OK, sounds good.
    Jul 24 04:21 PM | Likes Like |Link to Comment
  • Netflix Earnings: Good Not Enough For Premium Stock [View article]
    Any chance you are including DVD in your analysis? The numbers I have been citing (both the 12 month obligation and the content expense) are for the streaming business specifically. The DVD business had cost of revenues of $591 million last year.

    If you include that, global cost of revenues is the $2.63 billion figure you cite. But the DVD costs are treated separately in the segment information, as cost of revenues for the domestic DVD segment.
    Jul 24 03:21 PM | Likes Like |Link to Comment
  • Netflix Earnings: Good Not Enough For Premium Stock [View article]
    Not sure where you're getting the $2.63 billion number. Based on the segment information in the 10-K, the streaming content expense is just over $2 billion for 2012 ($2.03 billion).

    Your general point that the cost is ultimately higher than the liability is certainly true. There may be items where Netflix can't estimate the cost, and more importantly, items that Netflix contracts for during the year. Those can inflate the recorded expense.

    However, I think 2012 was a bit of an anomaly because Netflix was in the midst of launching so many new international markets. In most cases, Netflix buys content on a country-by-country basis, so when opening a new market it had to spend for whatever content the service initially had in that market. Now that the launch rate is slower, the content expense shouldn't be incurred in such a lumpy fashion.

    I still think Netflix is a landmine, but for other reasons!
    Jul 24 08:41 AM | Likes Like |Link to Comment
  • Netflix Earnings: Good Not Enough For Premium Stock [View article]
    Bill,

    I think Amazon Prime is a bigger threat than Hulu Plus. That said, a big difference is that Amazon Prime and Hulu Plus are both losing LOTS of money, and seem content to do so for the foreseeable future. Just in the last few months, Amazon has won exclusive deals for the Nickelodeon kids shows, Downton Abbey, etc. These are not things that Netflix walked away from because nobody was watching. I think they didn't have the budget to buy those exclusive licenses while also hitting their profitability targets.

    As a result of being repeatedly outbid by Amazon, Netflix is making more money than expected... for now. (This is supported by the fact that domestic streaming contribution profit beat the top of the guidance range even though subscriber growth was in the middle of the range.) But eventually subscribers are going to notice that Netflix is losing a lot of content, and that it's going to Amazon. At that point, Netflix will either have to pay up for new content or watch churn spike. Just my two cents!
    Jul 23 08:23 PM | 1 Like Like |Link to Comment
  • Netflix Earnings: Good Not Enough For Premium Stock [View article]
    I obviously don't know for sure, but I don't think that there are any material costs of revenue for the streaming service aside from content. The only things I can think of are credit card fees (but those may already be excluded from revenue) and content delivery (which is absurdly cheap these days and may get classified in technology expense anyway.

    As for the other point, take a look at p. 57 of the most recent 10-K. Netflix changed the way they present the streaming liability, which I believe accounts for the discrepancy. As of Dec. 31, 2011 (in restated form), the current content liability was just over $1.7 billion: exactly on target.
    Jul 23 08:15 PM | Likes Like |Link to Comment
  • Netflix Earnings: Good Not Enough For Premium Stock [View article]
    I've never quite understood the obsession with Netflix's off-balance sheet content liabilities. Based on the most recent 10-Q, the total obligation (on and off-balance sheet) was $2.4 billion over the next twelve months, and in the June quarter Netflix recognized global streaming content expense of over $630 million. In other words, the accounting expense is already hitting the P&L faster than the run rate necessary to burn off the liability.

    To put it another way, amortizing content expense is by far the dominant expense line item for Netflix. Streaming content expense is still more than 75% of streaming revenue on a global basis.

    In my mind, the real problem for Netflix is quite different: I believe the company's content spending is too low to keep the membership base satisfied over the long-term. There's huge inflation occurring in the content market, and Netflix would have to grow its spending much faster than it has done recently, just to keep the same amount/quality of content. (Think of it this way: first, new bidders have entered the market, which could easily raise content prices by 50%. On top of that, Netflix is going for exclusivity, which creates a huge opportunity cost because content owners cannot sell to 2 or 3 different services; that probably doubles the price on top of the 50% increase. So to renew the whole content library as exclusive could triple Netflix's content cost.)

    Netflix's unwillingness/inability to pay market prices for its full content library will lead to continued content attrition over the next several years. Perversely, that leads to margin outperformance in the near term, which is exactly what we saw in Q2. But eventually, losing lots of content to Amazon and other competitors is going to translate to lower member potential. It's not possible to boost margins indefinitely by not renewing popular (read: expensive) content.
    Jul 23 02:52 PM | 1 Like Like |Link to Comment
  • Apple: Stop The Dividend [View article]
    I think the dividend is a useful hedge against the possibility, however remote, that the stock is overvalued. Tim Cook essentially acknowledged your point when he chose to devote essentially all of the increase in Apple's capital return plans to share buybacks.

    Also, unless you are in the highest income bracket, I believe qualified dividends are still taxed at 15%. If you are in the 15% bracket or below, dividends are tax free.
    Jul 2 04:41 PM | 6 Likes Like |Link to Comment
  • FedEx Earnings Preview: Undervalued But Global Growth Is Needed [View article]
    Thanks for the article. I would have liked it if you had covered the ongoing cost reduction program in the Express segment, though. If FedEx hits its cost reduction targets, Express profit should improve by around $1 billion after tax by 2015: that's enough to get to $9+ in EPS assuming demand and results in the other segments go sideways.

    The real question for me is whether those targets are achievable (secondarily, whether the cost cuts will be partially offsetting further yield deterioration). If EPS is really going to $9 or $10 by FY15, FDX seems like a no-brainer buy.
    Jun 13 03:37 PM | Likes Like |Link to Comment
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