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Adam Levine-Weinberg  

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  • Netflix Earnings: Good Not Enough For Premium Stock [View article]

    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, 2013. 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, 2013. 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, 2013. 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, 2013. 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, 2013. 03:37 PM | Likes Like |Link to Comment
  • American Airlines Shares Keep Climbing Higher After Recovering From A Near-Fatal Tailspin [View article]
    Thanks for the article. I don't think there will be as much left for equity holders as you assume. I'm not sure where you got the $3.5 billion figure for unsecured claims: the most recent figure that I've seen (from last week) estimates all the claims, including labor, at $7.3 billion. See p. 486.

    There's also a handy-dandy chart on that page laying out estimated recovery scenarios. Even at $20 for US Airways/AAG, AMR shareholders would only get about $9 of value. That drops off quickly: if the new company is valued at $16/share (approximately $12 billion), AMR shares would be worth less than $3.

    Jun 6, 2013. 08:45 PM | Likes Like |Link to Comment
  • Dell: Battle Royale For Control Offers Surprisingly Interesting Risk-Reward [View instapost]
    I agree that HP is still way undervalued (HP is one of my largest holdings). But if you were going for a leveraged bet on one of these two companies, I'd probably prefer an out-of-the-money LEAPS option on HP over the Dell stub.

    The real problem with Dell from a strategic perspective is that PCs, servers, and enterprise services are basically commoditized businesses at this point. There are other areas that are potentially promising, but IBM, Oracle, HP, Cisco, etc. are already there as well, so there's no real assurance of success. The big difference between Dell and HP is that HP has the printing cash cow. I would value the printing business alone at about $25 billion.

    As for the share count: I think this could be an atypical case. If you think the stub is worth less than $1.65 (the people who would be selling right away), you would be better off taking the Dell-Silver Lake offer. On the other hand, if Icahn convinces you that the stub is worth much more than $1.65, why take just one when you're being offered the opportunity to get 7.27 more at $1.65 each?

    It would appear that Icahn needs to convince a majority of shareholders that the stub would be worth significantly more than $1.65 to win the proxy battle. Because of that setup, I could envision a lot of people taking the stock offer if Icahn's proposal is implemented.
    May 23, 2013. 11:37 PM | Likes Like |Link to Comment
  • Dell: Battle Royale For Control Offers Surprisingly Interesting Risk-Reward [View instapost]
    Hey Samir: Thanks for the shout out, and an interesting read. I also happened to read Greenblatt's book recently. Dell could definitely be a typical stub case for him, but I don't think so. In fact, I'm still not confident that Icahn/Southeastern will turn this proposal into a firm offer, although they do seem to be lining up lenders.

    A lot of the delta here will depend on the added interest expense and the number of shareholders who opt for additional shares rather than cash. There are two reasons why I don't like the risk-reward here:

    1) Following Icahn's numbers and plugging in the Dell management projection for $3 billion of operating income this year, the stub would have EPS of $0.51. However, Q1 non-GAAP operating income was $590 million, which makes $3 billion for the full year pretty challenging. I would say $2.5 billion is a likely figure, but not necessarily conservative. (After all it assumes sequential improvement at some point this year)

    The $500 million reduction to operating income would lead to pretax EPS of $0.40 (i.e. Samir's projection), but this is a "likely" number, not a conservative figure. I would assume tax rate of 20%-25%, which would get you to $0.30-$0.32 after tax. Dell would be more leveraged than HP in this scenario, while having higher exposure to PCs, so I think it would deserve a multiple well below HP's 7X. $1.65 might be a fair valuation here, but I don't think it's especially conservative.

    2) If every Dell shareholder opts for more stock rather than cash, this deal will function as an 8.27:1 stock split. Creating value depends on buying out a substantial proportion of Dell shareholders. I don't have a good sense of what constitutes today's shareholder base, but I wouldn't be surprised if people who love the stub stock are "selecting in", as Samir suggests here. With just 20% of shareholders opting for more stock, the share count goes to 4.4 billion. With 40%, it goes to 7 billion. This might save $200-$300 million in interest expense, but would drop EPS to the $0.20-$0.25 range. In that scenario, I think $1.65 could be a best-case valuation.

    There could be upside if the company manages to cut more expenses than are included in the current management business plan. On the other hand there could be downside if interest rates are higher than Icahn's projections or if the PC business continues to deteriorate.

    If I were a shareholder, I'd take the cash. But then again, that's why I'm not a shareholder; there are better opportunities in this market.

    May 23, 2013. 09:29 PM | 1 Like Like |Link to Comment
  • This Is Why Netflix Will Go Bankrupt [View article]
    As a big-time Netflix bear, I agree with the overall short argument. However, I think this article is not entirely fair to Netflix. The acquisition of content is rising rapidly because of the growth of the streaming business, and particularly because of Netflix's entry into new markets. These require a significant upfront investment in content, but revenue will take a few years to "spool up". If revenue never catches up to content expense, Netflix could always close those markets.

    On the other hand, revenue growth appears more moderate because you're lumping all three segments together (DVD, domestic streaming, and int'l streaming). DVD revenues are declining, offsetting some of the growth in streaming.

    If you just look at the domestic streaming business, revenue grew 26% YoY last quarter, while cost of revenue (which is primarily amortization of streaming content) grew 21%. So Netflix was able to leverage content expense in the domestic segment, which is more mature. This also suggests that there is no meaningful risk of bankruptcy.

    For me, the short argument is just a question of valuation. After today's rally, NFLX has now surpassed a $14 billion diluted market cap. Even if the company fulfills all of the hopes and dreams of the bulls, I don't see any long-term upside.
    May 13, 2013. 04:22 PM | Likes Like |Link to Comment
  • Nvidia: A Short Squeeze May Be Coming [View article]
    @PureValue: Not sure why you are so upset. Buy and hold is still a strategy that works, but only if you ignore the "noise" in the market (except perhaps to buy more if the stock drops for no reason). Over the long term, it's still pretty difficult for a stock to defy company fundamentals.
    May 11, 2013. 11:14 AM | Likes Like |Link to Comment
  • Nvidia: A Short Squeeze May Be Coming [View article]
    I still like NVDA; but I'd be surprised if we see any sort of short squeeze tomorrow (or anytime soon). NVDA's results this year are going to be pretty mediocre barring something completely unforeseen; OpEx is still rising while Tegra sales are stagnant and the PC market is under pressure.

    I think this stock is more likely to take off next year, if and when it demonstrates some success with Tegra 4i and GRID. Just my two cents.
    May 9, 2013. 03:36 PM | 2 Likes Like |Link to Comment
  • How Apple Let Its Shareholders Down [View article]
    This is an interesting take, but all you are really saying is that Apple was clearly undervalued five years ago and is clearly undervalued today. You could just as easily write that the market is letting Apple down, or something like that.

    The fact that the share price has gone up over the period you analyze is driving your conclusion. I'm pretty sure that all of the "value" you have created is from buying back shares in the 2007-2010 period at an average price under $200. Obviously, a good share buyback is designed to buy shares when they are undervalued. But it's a little unfair to blame Apple's management for not buying back shares without also blaming everybody else who did not buy Apple shares before they went up.

    If you assumed instead that Apple had returned cash through a dividend over your horizon, I think you would have a much more equivocal conclusion. And if you had just analyzed the last year, you would have found that Apple was wise to not buy back shares when they were trading at a significant premium to today's price.
    May 6, 2013. 04:07 PM | 2 Likes Like |Link to Comment
  • Why $100 Brent Will Not Last Through 2013 [View article]
    I'm not hedging my claim that oil will drop below $100 by year end. In my previous comment, I meant that it is a question among analysts, investors, etc. when Brent will drop below $100, but my opinion is (still) that it will happen this year.

    Very little of current production is marginal at $90 or even $80/bbl, and most oil producers have hedged a lot of their future production anyway. So I don't see any material change to oil production from a 10% or even 20% drop in prices. Obviously, if we had a late-2008 style collapse, that would be a different story.

    I don't really buy the argument that monetary policy is driving oil prices long-term. Obviously big monetary shocks affect the commodities market, but ultimately high oil prices depress demand, leaving no one to take physical delivery. Theoretically, you could store the unwanted physical oil, but that's a lot more costly than storing gold, if your goal is just inflation/currency protection. If QE eventually leads to rapid inflation in the US that would presumably drive up the dollar price of oil, but I don't expect that to happen (as I've written previously on SA).
    May 5, 2013. 01:48 PM | Likes Like |Link to Comment
  • Why $100 Brent Will Not Last Through 2013 [View article]
    That's a fair perspective. However, I don't expect crude to fall quite so far that it becomes particularly affordable in developing countries. As a result, there's always going to be an efficiency drive in the third world as well as in developed countries. In my opinion, development today won't lead to as much incremental oil demand as was the case fifty years ago.

    The oil futures market suggests that people expect oil prices to decline over the next several years. The real question seems to be when the bulk of the decline will occur.
    May 4, 2013. 04:05 PM | Likes Like |Link to Comment
  • Why $100 Brent Will Not Last Through 2013 [View article]
    It's just an endless guessing game. Now Brent is back up above $104 on stronger economic data. At a fundamental level, the supply picture is really benign. OPEC probably has as much as 4 million bpd of spare capacity, and inventories are still rising. With WTI still hanging in the $85-$95 range, oil companies will keep drilling in Bakken/Permian/Eagle Ford as fast as they can. Domestic production is already up around 300K bpd from the beginning of the year. I will be interested to see if US production hits 8 million bpd before year end.
    May 3, 2013. 12:10 PM | Likes Like |Link to Comment