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Adam Levine-Weinberg  

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  • 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
  • United Airlines' Path To Much Higher Profits [View article]
    A few things: First, just to use the example of CSX, it has a 25% pretax margin. Delta is working (successfully) to get to the 8%-10% range. You should not expect the two to have similar multiples, because there's clearly a lot more risk in the lower margin business.

    Second, United and Delta have both set an explicit goal of growing at less than the rate of GDP. So I would expect the long-term growth rate for large legacy carriers to be even lower than for rails or other industrials. I think you could make an argument that they are all overvalued, but it's hard for me to be excited about many airline stocks today. (That said, there are several higher growth/lower valuation names that I think are very attractive.)

    Third, rails have a huge moat that doesn't exist for airlines. The most important capital asset for a railroad is the track it owns, which represents an extremely high barrier to entry. By contrast, airline assets are inherently movable. Obviously, it's a bit of an oversimplification, but new airplanes can move into your market on a moment's notice.

    Arguing that rails and airlines are basically the same is effectively arguing that Warren Buffett is a moron, since he thinks airlines make terrible investments yet he plunged billions of dollars into BNSF. I think Buffett overstates the case against airlines, but I'm certainly not going to buy an airline stock over a rail stock without some kind of discount.

    Nov 22, 2013. 03:03 PM | 1 Like Like |Link to Comment
  • Danger Zone: Netflix [View article]
    Netflix had a pretax margin of 4.5% last quarter. But if you back out the international revenue and contribution loss, Netflix had a 13.4% pretax margin. That's not quite as high as the peak, but it's getting close, and has been rising pretty strongly in recent quarters. And non-paying customers represent less than 10% of the subscriber base.

    I think one of the big reasons why Netflix's stock price is so out of whack and so volatile is that the vast majority of arguments made for one side or the other are bogus. As an investor, it's pretty frustrating. But the market will sort things out eventually.
    Nov 22, 2013. 02:41 PM | 1 Like Like |Link to Comment
  • Danger Zone: Netflix [View article]
    Netflix has said that they are doing more marketing around DVD now in order to try to manage the decline. If I'm not mistaken, the "cost" of the free month is classified as a marketing expense. I would assume that this is what's going on.
    Nov 22, 2013. 02:31 PM | 2 Likes Like |Link to Comment
  • Danger Zone: Netflix [View article]
    David: First, I agree with the general thesis that Netflix is overvalued based on any reasonable growth assumptions. But it seems like your entire model is held up by the 15% pretax margin projection. I would say that most Netflix bulls think the company is becoming a "media" company with a potential for 30% margins or better. With more original and exclusive content, Netflix should have better pricing power in the future than it did two years ago. Furthermore, just by adding subscribers Netflix can leverage the content it has already purchased.

    Your fixed margin assumption (even if it's generous for the next year or two) is basically an assertion that operating leverage doesn't exist for Netflix's business. Presumably that's due to competition for viewers from other services and competition for content, which would continue driving prices up. Personally, I'm sympathetic to that argument. But right now, you have a rigorous DCF model attached to a "hand-wavy" argument that costs are going up but price increases will drive away customers. What do you think the content cost inflation rate will be? What do you think the effect would be over the next several years of raising the base price in the U.S. to $8.99 or $9.99? Those are the really key questions, in my opinion.

    Nov 22, 2013. 10:08 AM | 2 Likes Like |Link to Comment
  • United Airlines' Path To Much Higher Profits [View article]
    I think it's a little late to talk about the airlines having low valuations. I was promoting this line of thinking last year when Delta was a single digit stock. At $27, I think it's a good company but not one that I want to invest in.

    IMHO, investors are flocking to United because it seems cheap on a P/S basis compared to Delta. It's basically been riding the coattails of Delta and US Airways for a year now. People seem to assume that there's no fundamental reason why United should have lower margins than its competitors.

    The problem is that United has a MUCH worse cost structure than Delta or the new American. The biggest myth around this $2 billion plan is that these are "cost cuts". To be clear: they are cost cuts from a baseline under which costs would have risen by $2.5 billion or more in the next 4 years (holding fuel prices constant). When the program is complete, United will have higher unit costs than it does today (again, holding fuel prices constant).

    Now, it's great to hold cost growth below the rate of inflation, which is what this plan does. But Delta and American have similar plans which will result in similar or better relative cost performance over the next 4 years. Bottom line: in 2017, United will still have the highest cost structure in the industry. United already has the best revenue performance in the industry, so there's more risk than upside there on a relative basis.

    Unless you think that the airline industry as a whole is going to sustainably earn well above its cost of capital (i.e. there are very high barriers to entry/expansion), I think United is in big trouble.

    Nov 22, 2013. 08:52 AM | 1 Like Like |Link to Comment
  • Netflix: Asking Key Questions For 2014 [View article]
    Bohsie: The big companies like Comcast, Time Warner, AT&T, etc. get the best pricing because they bring lots of subs to the table. Netflix can only do that if it brings ALL of its subscribers to the table. If it offers segmented service and only a few million people took the full "cable" package, Netflix would be a low-tier pay-TV company and would probably have to pay higher rates.

    BTW, just to be clear, this is totally a hypothetical. I don't think there's even a 1% chance that Netflix will ever do this. First, Reed Hastings has been very explicit about staying focused on the core offering (and that's really almost an ideology for him). Second, it doesn't make sense for the TV networks.

    What value does Netflix really bring to the table? It's basically a name with some software and delivery infrastructure that could be replicated for at most, a few billion dollars, and probably less. So if you're running a TV network, what's the advantage of selling your content to Netflix rather than selling direct to consumer, either alone or in partnership with other networks? Netflix is not really creating any value in the scenario we're discussing, so I don't see any way that this could become a major source of profit.
    Nov 20, 2013. 10:00 PM | Likes Like |Link to Comment