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Davis Freeberg  

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  • The Curious Case of the Economics of Netflix [View article]
    Why would someone short a company that has shown consistent growth and popularity? The only answer that seems to make sense to me is that they think that there is a problem with the valuation. This is fair enough, but still a sucker's bet in my opinion. Not only do they need a good company to stumble and for those investors to lose faith, but even if short sellers are right, how much is Netflix's stock really going to go down as a result. Are we to believe that Netflix is going to crash to $25 a share because people tune in during the summer and tune out in the fall? Considering that there are so many frauds out there destined for zero, betting against a failing company seems like a much better risk equation. Maybe there are some who can make money squeezing nickels out of valuations, but if I'm going to bet against a turkey, then I want to know that the management/business model/etc. if suspect or fraudulent.
    Jun 6, 2011. 03:03 PM | 1 Like Like |Link to Comment
  • Video Surveillance of Sino Clean's 'Ghost Factories' Finds Little-to-No Activity [View article]
    I think it's funny how all the longs are trying to create a conspiracy around Mr. Little, instead of addressing the information that he is presenting. Since they seem to be fixated upon him, let's try to look at things from his perspective for a moment.

    Like it or not, IFRA and LIttle are trying to make money from their articles by generating interest in their research operations and from shorting the stock. Since getting new research clients involves being correct on a consistent basis, it's hard to understand why IFRA would try to falsify this much evidence video evidence, especially when it's a lot easier just to spy on bogus factories and catch them in the act. Logistically, just think about the resources IFRA would need to fake that much video, wouldn't we be able to spot discrepancies like Little found in the company videos and even if you couldn't spot discrepancies, wouldn't it just be easier to sit outside of a ghost factory and then figure out who owns it? Considering that they've monitored a large number of locations, why would they choose to fake it now, when it easier to cast a wide net and then focus on the most serious offenders?

    If IFRA were in it for a quick trade, maybe you could make the case that the evidence is just trying to scare investors, but IFRA has already been right more than once now, which suggests they have more to lose by lying, then they would by faking the truth.

    If Mr. Little is the one with the nefarious intentions, why would he pick a company with real earnings and explosive growth, when he has IFRA's treasure trove of data to comb through first? Wouldn't you target the obvious frauds first? That way even if their investors didn't take the bait and panic, you'd still have a decent chance that it would fall apart anyway. It wouldn't make sense for him to short the company if the activity that he observed was consistent with the SEC filings and if he was just randomly making this up, then it should be a lot easier then it's been for the company to prove that his videos are wrong.
    May 8, 2011. 04:02 PM | 1 Like Like |Link to Comment
  • A Shareholder Activist Takes Aim at Netflix [View article]
    Normally, I would agree that adopting this would be good for shareholders, but when it comes to Netflix, I think you can make an argument that shareholders will be better off with less disclosure. Getting to the top of the internet video industry hasn't happen by luck. There's been a lot of times where management has head faked competitors by pointing in one direction and carrying the ball in another. For example a year or two ago, they were downplaying streaming and suggesting disc shipments would grow for a long time, now we know that wasn't really the truth, but because they could keep certain metrics a secret, they were able to grab a huge share of the market before Amazon, Blockbuster, etc, joined the subscription streaming party. Going forward, Netflix will need even more flexibility in the international markets. By making it harder for them to keep their secrets, competitors will be better able to nip at their lead. For all I know this will pass, but I doubt it will be by 70%. Management has earned the right to their secrets, especially in an emerging market like theirs.
    Apr 28, 2011. 12:56 PM | 3 Likes Like |Link to Comment
  • Who Should Buy Blockbuster? [View article]
    I think that you are discounting what really held Blockbuster back. Netflix hasn't been content to share the industry, they've wanted to price the video store into oblivion. By engaging in a price war, Netflix won the larger prize even if it meant foregoing profits. To a certain extent, they are doing the same with their streaming service now. While competitors like Amazon could become an obstacle, Blockbuster by mail will no longer be a threat. Netflix's science and scale gives them the ability to run their DVD program at margins that no one else can match. When Blockbuster did have 3 million customers, it was at an aggressive price/promotion that only hastened their demise. Whoever ends up buying Blockbuster will have the same tightrope to walk across. On one hand they'll want to prepare for the future, but at the same time it's impossible to ignore the billions in revenue that Blockbuster brings in from their stores and the profit that could be made if you could leverage right. If Blockbuster was only selling the by mail service, maybe you could argue that a small start up could buy it and operate at such a nimble price that they could attract some market share, but with the stores, the debt, the legacy of failure, I'm not convinced that they could be competitive. Redbox, Apple, even Megavideo I could see potentially impacting Netflix, but even if this pans out they way that you're betting, how much of an impact would this really have on Netflix's earnings? Unless Blockbuster can take 5 - 10 million customers from them, it's hard to connect your logic.
    Feb 22, 2011. 10:31 AM | Likes Like |Link to Comment
  • Who Should Buy Blockbuster? [View article]
    I followed your logic all the way until you tried to connect Blockbuster's sale with Netflix's stock. With $1 billion in debt, you're talking about a $100 million advantage over whoever does buy them, plus none of the headaches associated with bk. If Netflix could thrive when Blockbuster was competitive, I don't see how a zombie Blockbuster riddled with debt would be a problem. Remember Movie Gallery restructured before their second and fatal bankruptcy too. If buyers weren't interested in them, it's hard to see Blockbuster attracting a bid. Then again, there are probably a number of potential suitors who aren't on this list. Bottom line is that it may be fair to say that whoever buys them could potentially be a problem, but seems erroneous to actually bet money on this impacting Netflix's performance when it a.) never may actually be a problem or b.) will take years to play out and will have minimal impact.
    Feb 22, 2011. 08:00 AM | Likes Like |Link to Comment
  • An Estimated 800,000 Households Abandoned Their TVs for the Web [View article]
    Won't argue with the math, but not sure that I agree with the conclusion. My TiVo is what made it possible for me to ditch cable for free HD-OTA and streaming internet content. Who needs 100 channels when you have 100 programs always waiting for you on demand? Even without cable, I've still managed to fill up the hard drive on my DVR.
    Apr 13, 2010. 12:29 PM | 2 Likes Like |Link to Comment
  • Time for TiVo to Say Ta Ta [View article]
    Boxed in or not, don't underestimate the value of their IP. Dish has 8 million DVRs and there are another 32 million + growing out there. Lets assume for a moment that TiVo has in fact patented the DVR and is eventually able to collect royalties on the 40 million boxes that are out there. Even assuming a modest $2 per month fee to TiVo, you're talking $960 million a year in licensing revenue (aka high margin profit). A settlement with Dish alone could net them half a billion a year. For a company with $500 million in cash, no debt and an IP portfolio that keeps getting stronger and stronger, it would be foolish to count them out at this stage of the game. Maybe they do eventually sell the company, but they've got a lot more options than you're giving them credit for.
    Mar 26, 2010. 02:54 PM | 8 Likes Like |Link to Comment
  • Where to Next for Blockbuster? [View article]
    Plus the taxes on the transaction would bury them.
    Mar 19, 2010. 01:51 PM | Likes Like |Link to Comment
  • Where to Next for Blockbuster? [View article]
    @relmar2k3 - 10 million *.23 a share = $2.3 million this is a rounding error for the folks at GS. I bet that their tax loss is worth more than their stock holdings. Icahn spent something like a half a billion on Blockbuster and he's left the board. I wouldn't count on the insiders being too interested in protecting the equity. As far as kiosks saving them . . . Coinstar has three times as many kiosks, are getting all of the revenue from them instead of a fraction for licensing their name (NCR isn't even buying their DVDs from Blockbuster) and with their coin counting unit, their ebita was still only $80 million last year. If Blockbuster has $200 million a year in interest payments, how are kiosks going to save them? With revenue dropping like an anvil in the ocean, there's no way that they can service their debt. Irregardless of what the CEO said on their conference call, if you run the math they run out of cash on July 4th of this year. If their negative trends accelerates, it happens at their annual meeting. With their 2012 bonds at a 106% yield, how are they going to refinance their debt on reasonable terms? If $5 billion in revenue turns into a couple hundred million in kiosks, it won't save Blockbuster without the bankruptcy.
    Mar 18, 2010. 10:13 AM | Likes Like |Link to Comment
  • Why Blockbuster Won't Survive: CEO Says 'Conservative Approach' Required For Digital [View article]
    "This situation won't go on forever. At some point, the cable broadband providers are going to find some way to recoup their losses rather than adding more infrastructure to be exploited for the benefit of their competition without compensation."

    -I think that you misunderstand how the cable industry works. Consider for a moment cable video vs. internet. Not only do cable companies have to pay for the bandwidth to deliver that video, but they also have to pay money to the content owners in the form of licensing fees. Internet on the other hand is a dumb pipe that has no licensing costs because consumers are getting the content on their own. If both services are costing roughly the same, this makes internet video far more profitable to a cable company than the video side of the business where they are lucky to break even. The move to meter your bandwidth isn't about killing the golden goose, it's about squeezing more profits out of their customers. They understand that digital video is driving demand for internet and won't be in a hurry to make it so restrictive that they can't keep their customers happy. Cable companies have much more incentive to keep their internet customers happier than their video ones.
    Mar 8, 2010. 10:53 AM | 3 Likes Like |Link to Comment
  • 25 Stocks Under $250 Million Worth a Good Look [View article]
    Hi Tony - I tend to find ideas for stocks in a lot of different places and then do research from there. Typically, it might be something someone says on a conference call that makes me look for a competitor or supplier who might benefit or it could just be a macro thesis that I have and I then go and look for industries that would benefit. I also use various stock screeners like the one on Yahoo! and Bloomberg that allow me to filter by market cap and by other criteria such as having more assets than debt, limited goodwill positions, rising sales, positive earnings, etc.

    Very rarely will I look at a stock that I feel like someone is trying to "sell" me. Whether that means a active message board, a broker or articles that seem like they are slanted or about hype. The best way to turn me off to an idea is to tell me that I need to buy now.

    Since I'm typically seeking value, I prefer to find the idea on my own and then do research from there.

    As far as the pink sheets go, I won't even consider a stock that trades on them. If a company isn't going to do regular filings, it's a deal killer for me. If one of the stocks I owned went to the pink sheets, I'd probably sell, but typically I go into these positions understanding that 100% loss is possible and will refuse to sell even when I'm down (with the exception of some tax loss situations) I do own one over the counter stock and while I've lost a bundle on that one, I feel more comfortable with it because it's in a highly regulated industry that would make it tough for management to commit fraud. Doesn't mean that the company can't go bankrupt, but I'd rather make a bad bet on actual business results then realize that I'm helping to fund an endless underwriting. In the past my other OTCBB investments have done very well, but you need to research their management about 20 times more than you would a small cap.
    Jan 28, 2010. 11:50 AM | 1 Like Like |Link to Comment
  • 25 Stocks Under $250 Million Worth a Good Look [View article]
    Since MPAA seems to be of such interest, I'll expand on my thoughts here. First off, should you buy it now like the previous poster suggested? Since my investment philosophy involves finding stocks that are out of favor, it typically takes time for the results to show up. What this means is that I always have to be prepared to wait and for volatility. If you're looking to trade in and out of something, then you use a different criteria. If you're looking to own small cap stocks until they can become midcap or large caps then it's important that the long term viability be secure and that you try to get in at a discount. Sometimes this patience means that you miss out on bargains (hence why I only own 2 of the stocks on this list), but other times it means that you can take advantage of temporary bad news at the expense of those who are more short sighted. If MPAA tanks on bad earnings or has a partner walk away and their stock gets crushed, that's where I'd be salivating, not after it's doubled since kissing the bottom.

    The 2nd question of why do I think that they'll do an underwriting . . . if you take a look at their balance sheet, they've seen their accounts payable go from $32 million to $36 million from 6/30 to 9/30. They've also seen their current debt rise from $21.7 - $25.4. With only $1.6 million in cash and $20.7 million in receivables, it makes me question where they'll get the $10 million that they need. Certainly they could sell less liquid assets, but in my experience companies would prefer to issue debt (not likely at fair rates given the size and assets of the company) or stock (hence concerns about dilution) Since they've allowed these balances to rise, it makes me wonder if they're taking advantage of vendors while they continue to try and search for a solution to this near term problem. Now there could be other rationale explanations for the increase and certainly inventory can come down when they report earnings again, but I'd want to be convinced that an underwriting isn't going to take place before I'd risk putting my own money in. Furthermore, because the company sold stock in 08' it suggests that management may have a propensity to raise capital in this way. If earnings came out and they demonstrated that they had plenty of cash on hand, I think these concerns go away and one could wait for the stock to have a bad day to pounce, but if earnings come out and they still don't have any cash on their balance sheet to speak of, then it's a fair question to ask how they are going to fund their operations.
    Jan 27, 2010. 10:22 PM | 4 Likes Like |Link to Comment
  • Saving Blockbuster [View article]
    You don't need to tell me that the DVD is going the way of the dinosaur. Take a look at my blog and you'll see that I know this better than anyone. I think that the big picture that people who take this position miss though is that Blockbuster's stores are incredibly profitable, once you strip out the debt. If they can squeeze $500 million in cash out of those five years instead of paying interest on a huge amount of debt, wouldn't that give them the ability to reinvent their business? No one seems to think that Best Buy will be gone in five years. Would it really be all that hard for Blockbuster to sell TVs instead of DVDs? Keyes knows this, he's already said that he's betting the company's future on it, he just hasn't be able to execute because the money is going to the debt instead of going to buying new forms of inventory. If you take a look at the most profitable store based on square footage, it's Apple. If a company who is at the heart of the digital transition can earn more than stores like Nordstrom or Macy's, doesn't that suggest that there's room for retail businesses, even if they aren't in DVDs? How could Blockbuster compete in any business when they've got to spend $10 million a month for past sins? I don't think they can, but if they shed the debt, than that $10 million can buy a lot of slushies and they can become the next 7-11 or consumer electronics store.
    Jan 22, 2010. 11:25 AM | Likes Like |Link to Comment
  • Saving Blockbuster [View article]
    Thanks for the comment PorkChop here are a couple of ideas -

    "First, the BBI 11.75% notes have a first lien on basically all the assets of the company and domestic subsidiaries. How are you going to "spin off" he mail and kiosk assets into a new entity and get around the inevitable fraudulent conveyance suits?"

    -It would absolutely take cooperation on the part of bond holders to get this done. I think you offer them a convertible and they can choose to exchange into the spinoff if and maintain their same protections. If the spinoff goes bust, they keep their debt, keep their position and meanwhile Blockbuster wasn't forced to close stores. The only way they are hurt is that they miss out on the interest payments in exchange for a very valuable stock option. I think enough bond holders would say yes to this, especially when they are facing the prospect of having to seize control in bankruptcy and when Blockbuster has two more years to run the company into the ground before they can do anything about it. Maybe I'm wrong, but certainly worth a shot compared to cutting marketing, inventory and ignoring the digital threat no?

    Second, based on your analysis of (which I do not dispute) the value of mail and kiosk you get value of those businesses of $425mm. If you were able to segregate those assets (not sure you can because of point one) how will you be able to raise a $500mm convertible. That implies negative equity value for that entity. If the value of those enterprises really is $425mm and you could find a way to unencumber them and list them as a separate entity (or do an exchngeable with unsecured Gtee's, it doesn't seem likely that you could raise more than a couple hundred million if that in a convert?"

    -This is why I think you need to include the kiosk and digital businesses along with the DVD by mail. Perhaps, NCR could be invited into the issue, which could boost the value or you could see an Amazon or Apple buy the unit outright so that they could use the first sale doctrine to boost their own digital efforts. Again, no guarantee that this could even be done, but considering that the entire Blockbuster business has a market cap of less than $100 million, shouldn't these assets have a chance to trade at significant premiums even if Blockbuster video doesn't benefit directly?

    "Third, just because you "segregate" by mail and kiosk, does not mean that these businesses don't continue to cannibalize the brick and mortar business.

    -Absolutely, it would cannilbalize their retail business. Blockbuster would be creating a foe by doing this (or at least a thorny franchisee of sorts), but this is going to take place whether they spin the division off or not and Blockbuster's problem today is that they have to focus more on the past (retail) and that jeopordizes their future (digital/kioks/by mail) At one point they were going gangbusters with their by mail program, but stopped because of this competiton. Mr. Keyes did a brilliant job at 7-11. If he was given the capital and control over the retail stores, I think he could do a brilliant job taking over where Circuit City left off. Right now, he doesn't have time or money to do this, without the debt, I might even be willing to bet on him. As is, he's doing a lousy job by ignoring the future and driving the stores into the ground by trying to maximize cash flow to pay the interest on the bonds.
    Jan 21, 2010. 03:20 PM | Likes Like |Link to Comment
  • Saving Blockbuster [View article]
    Stock valuations tend to be more of an art than a science, so math doesn't really have a lot to do with it. What I'd ask from you is to come up with your own valuation for the Blockbuster Express unit and plug that in. I'd also point out that with the bonds trading at a significant discount, Blockbuster wouldn't necessarily have to pay the full $600 million to redeem them. They could certainly buy a large portion on the open market and quietly retire them.

    As far as your point about the NCR partnership goes, as I mentioned the devil is in the details. Since Coinstar's situation is a little bit different, it probably doesn't offer an apples to apples comparison, but these numbers were taken A.) at the bottom of the market and B.) using a 50% discount, so I feel that it's a conservative enough estimate. Using different comparables consider the following situation.

    Because Blockbuster Express is built around a royalty business, it means that nearly 100% of the revenue it produces is pure profit. On Wall St. people pay significant premiums for this type of revenue because there is no cost of goods associated with it, thus very little risk to the owner of the brand. Lets assume for a moment that Blockbuster is getting a 10% revenue share from the deal (I've heard whispers of 9%, but lets keep the math easy)

    According to Redbox, they rented 2 million DVDs on New Year's Eve. This was done with approx 20,500 kiosks, so if we assume that this is typical behavior and that Blockbuster can achieve similar business on their kiosks, then you're looking at approximately $97.50 per day at the $1 rental point (I think within 2 year we see kiosks at $2, but that's another issue) At a 10% royalty, it would suggest that Blockbuster can bring in $9.75 per day from each kiosk. Not a lot, but with 10,000 kiosks by the end of the year, we're talking about $97,500 in free cash flow per day with almost zero expense associated with it. Multiplied by 365 days a year (no holiday pay for robots) you're looking at a revenue stream of approximately $35.5 million in profits for the Blockbuster express unit.

    Since Wall St. pays such a high premium for high gross, high growth businesses, it's not unreasonable to expect a 25 P/E multiple for something like this or even a 5 - 10x times sales.

    At a 25 P/E it would value the unit at over $800 million. At 5 to 10 times sales you're looking at a more reasonable $175 - $350 million valuation for the unit. To find comparables to support this number, I might point towards IDCC which is a pure licensing businesses that has to sue partners to get them to cooperate. They trade at approximately 4 times last year's revenue, so even at a 5% royalty rate and a conservative estimate on the multiples, it's not a stretch to value this business at over $100 million for what Blockbuster gets.

    At the very least when you consider that Blockbuster currently trades at just 5% of their annual sales, it's clear that this unit is being undervalued by being lumped together with their dying video store business. Wouldn't Blockbuster's shareholders be much better off by spinning off the high growth units so that they could realize a fair value for those assets, even it the video stores were toast? Even at a 1 times sales (a very bearish valuation) you're looking at a difference of 20 times what investors are paying for the unit today.

    You can run the numbers and argue with my art, but you can't disagree with the math.
    Jan 21, 2010. 03:02 PM | Likes Like |Link to Comment