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Adam Levine-Weinberg

 
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  • Netflix: Asking Key Questions For 2014 [View article]
    I think you are way off in your estimate of overhead. It's impossible to give an exact number, because cable operators don't break down costs to that level of detail between the video, internet and voice services that they operate on the same lines. However, for Comcast, content spending recently has been close to 45% of video revenue, and the operating income before D&A was over 40% of revenue for the whole cable segment (of which half the revenue is residential video).

    That suggests that the overhead, aside from capital investment (which would be necessary anyway to maintain the internet and voice services) is less than 15% of revenue. The biggest cost savings that Netflix could theoretically provide is just accepting a lower margin.

    On the other hand, Netflix would have to pay a LOT more if it is actually segmenting customers. Perhaps it could theoretically get ESPN for the market rate of $5.50 or so per sub, but only if it's buying for 33 million subs. And also taking ESPN2, ABC, the Disney Channel, A&E, and ABC Family, for another $6-$8 per sub. If it's just offering full service as a separate tier, it would either not be able to get the content at all, or would have to pay a premium.

    The other cost you have to keep in mind is internet bandwidth. I have a 6 Mbps connection, which is plenty fast for my needs. But if I was all of a sudden trying to stream 2 or 3 full HD feeds, I would need to spend another $20-$30/month on internet.

    Adam
    Nov 19 01:05 PM | 1 Like Like |Link to Comment
  • Netflix: Asking Key Questions For 2014 [View article]
    Netflix relies on people having internet connections, most of which are from the same companies that provide pay-TV. The additional cost of operating a pay-TV system once you have the equipment in place and are operating a high-speed internet business is not that large.

    I think we're basically on the same page about what cable channels charge in retransmission fees (although ESPN is actually a little pricier based on the stats I've seen). But the cable and broadcast networks insist on bundling their channels, and for the most part, they insist on being included for every subscriber. When they don't, the cost is more like $8-$10 per sub (and then the cable company gets a markup on top of that): think HBO, Showtime, Starz, etc.

    Also, would this service include commercials? About half of the TV industry's revenue comes from commercials, so if you're cutting them out you should expect to pay about twice as much. A bunch of networks are up in arms about the "Hopper" which basically lets Dish customers skip commercials. I can't imagine them rushing into the arms of Netflix, which has taken a clear stand as anti-commercial.
    Nov 18 08:01 PM | Likes Like |Link to Comment
  • Netflix: Asking Key Questions For 2014 [View article]
    What's stopping them is cost. Anything is available for the right price, but Netflix's business model cannot support current season TV. TV networks can make $1-$2/month off of every pay TV subscriber through retransmission fees (ad revenue is just gravy). That's a guaranteed revenue stream of over $1 billion a year. This money is basically a ransom from pay-TV companies, because they can't afford to lose a key channel like TNT, TBS, AMC, USA, or even the big 4 broadcast networks.

    If Netflix starts getting access to the top content from these networks, they would be giving up their leverage with cable companies. So Netflix would probably have to offer something like $500M-$1B annually to each network to get its shows the day after they air. That's just not going to happen.
    Nov 18 04:50 PM | Likes Like |Link to Comment
  • Netflix: Asking Key Questions For 2014 [View article]
    The vast majority were streaming, as evidenced by the fact that after the split, over 90% of U.S. subscribers kept the streaming plan. In fact, the major reason why membership was growing so quickly was that Netflix had introduced the streaming only plan in 2010.

    I don't think the competition between Netflix and Prime Instant Video 2 years ago is anything close to what it is today. Prime had a tiny content library when it launched; now it is in the same ballpark as Netflix.

    At the end of the day, I guess you think the original content is enough of an attraction to keep most subscribers around, even with a price increase. It would help if NFLX provided any sort of data on viewership for these shows. I suspect that while each show has its hardcore fans, there is a large swath of Netflix members who are not that committed to the originals, or the service overall. That's where you stand to lose with a price increase.

    As long as Netflix is adding 5-6 million subs per year, I'd be surprised to see them increase prices. It's just not worth the risk. Only when organic growth disappears will Netflix look for a new lever to pull to boost revenue/profit.
    Nov 18 04:33 PM | 1 Like Like |Link to Comment
  • Netflix: Asking Key Questions For 2014 [View article]
    I don't think you quite understood my point. It's not that the subscriber count will drop; it's that it will stop growing, leading to multiple contraction. In the year ending Q2 2011 (before the last price increase), Netflix added 9.6 million domestic subscribers (nearly 60% growth). Prior to the price increase, that growth rate was actually increasing.

    After the price hike, while the subscriber number only dropped for one quarter, the growth rate was much slower. It's taken 2 years to get the next 9.6 million streaming subscribers (growth of about 20% annualized). If the next price hike causes a similar slowdown in growth (to 10% or less), I think multiple contraction would more than offset the EPS increase.
    Nov 18 02:08 PM | Likes Like |Link to Comment
  • 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
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