J Mintzmyer's  Instablog

I AM CURRENTLY SHORT 1W PUT OPTIONS ON NFLX. PLEASE KEEP THAT IN MIND, AND UTILIZE DUE DILIGENCE BEFORE INVESTING BASED ON MY CLAIMS.

Background

For a background basis- check out my original hypothesis last February. I missed the mark on revenues which has pushed my date for a liquidity crunch back a few months to a year. There's a chance I could be wrong again IF subscribers can grow fast enough.

Numbers are based on an annualized basis from the Q3-12 letter to shareholders data.

My recent article sums up the earnings miss and related events.

The Napkin Calculation

Please keep in mind this assumes 4 quarters at the annualized rate of Q3-12. It's very likely that revenue will increase slightly and that other expenditures will also increase. The question is whether or not revenue growth will outpace additional expenditures, especially international expansion.

Revenue at $905M*4= 3620M in cash inflows

Content liabilities are estimated at $2.1-$2.2B --> $2150M

$1470M left.

interest+g&a+marketing+techdev+fulfillment ($291.7*4=1167M)

$303M left. (please note that fulfillment will likely slightly decrease due to less DVD traffic, marketing and G&A increases should more than comp)

Subscription costs are difficult to breakdown... What is the cost of bandwith/servers/etc. What are the costs of tech support, and other related fees? The best method I can figure is to take the $602.1M in "subscription costs and subtract the $410.9M amortization of streaming content liabilities that is include in the operating cash flow statement. I am taking out the $410.9M since this figure would already be included in the upcoming $2.15B liability bomb.

This leaves $191.2M per Q X 4 = $764.8M annually

Netflix will burn $461.8M in cash in the next 12 months if revenues do not outpace related expenses!

Netflix has $790M in cash and STI, but the next 12m will not be much better. Plus NFLX will be forced to stop buying new content which will drive subs away. Any way you slice it, going cash flow negative on a large scale will spell the end for NFLX.

To avoid this end, they need to find $435M more revenue in the next 12m while holding expenses constant. Since it's impossible to hold these other expenses constant, I'll be extremely genererous and assume 50% growth. They need $870M.

How Many Subscribers Do They Need?

As DVD continues to go away, the revenue/sub continues to fall, although it appears to be stabilizing around $30/q--> $120y. Effectively they need 7.25M subs TODAY to breakeven, and that is WITHOUT counting DVD exits.

Let's assume DVD exits are extremely slow- only 250k leave each qtr. Since it takes approx 1.5 streamers to replace the revenue of a DVD user, we need a qtrly gain of 375k subs just to break even.

For the 7.25M mentioned above, assuming equal quarterly gains, and 0 gains today, they need approx 14.5M at the end of the year/4 qtrs = 3.625M subs + .375M from DVD = 4M each quarter.

In Summary

I'm being VERY generous to Netflix here, and they still need to gain 4M streamers each quarter for all 4 next quarters just to stay cash flow neutral.

The past 4 quarters from Q4-11 to Q3-12, NFLX has added .1M, 2.83M, 1.28M, and 1.78M.

Good luck!!

Disclosure: I am short NFLX, AMZN.

In January, I began my official Seeking Alpha "accountability audit" with a look back on my articles with a 6-month review. I include all of my articles and related recommendations and assume a $1000 investment in each position at the publishing date of each article. This is the fourth part of my "audit" which will include three positions that I have held for 6 months or longer.

My Article Recommendation Results (in order of article from 14 September-9 October):

I only included Focus stocks and all stocks included in list articles. I strongly frown upon the Seeking Alpha users who produce dime-a-dozen list articles and then cherry pick their winners, so I will stand by my lists and accept the total return. I will include comparisons of $1000 investment into each stock listed.

Best Buy: $43 loss on BBY vs. gain of $176 in the S&P 500. Still long BBY.

Diana Containerships: $382 return on DCIX vs. $236 total gain on S&P 500. Still long DCIX.

Dry Ships: $446 return on DRYS vs. $210 total gain on S&P 500. Still long DRYS.

My Total 6-mo Return (Articles from 15 Aug-25 Aug):

$785 gain vs. S&P 500 gain of $622. Relative to $3000 "invested" à 26.17% gain in 6 months compared to S&P 500 gain of 20.73% // out performance of 5.44% in 6 months.

Staying Honest:

In this issue, I "defeated" the S&P 500; however, BBY was a huge miss in terms of stock performance. I believe that BBY offers the best upside in relation to these three picks, and I recently doubled my holdings. I have lost to the S&P 500 in earlier issues, primarily due to the weak shipping market, so it's nice to finally see some of these holdings making a comeback of sorts.

I did not write many articles last fall so it will likely be a month or longer before I post another update on those positions.

I currently recommend a buy on BBY, DCIX, and DRYS, but I have already covered all three of these in previous target updates. Therefore, in six months from now, I will have no further price updates since BBY (10 Feb), DCIX (24 Feb), and DRYS (23 Jan) are already being tracked.

I will have $1000 long in GPS, CHN, IFN, GF, NM, DCIX and $1000 short in AMZN at February 24 closing prices.

I will have $1000 long in EXM, BBY, HPQ, PRGN, ISH, NMM, ESEA, NAT, and EXC at Feb 10 closing prices.

I will also have $1000 long in ARO, GME, DRYS, SBLK, MSFT, NOK and $1000 short in QLIK at Jan 23 closing prices.

Disclosure: I am long BBY, DRYS, DCIX.

Additional disclosure: I am long all of the recommended holdings.

Last month I began my official Seeking Alpha "accountability audit" with a look back on my articles with a 6-month review. I included all of my articles, and ended up with an S&P 500 beat of 2.83% assuming $1000 investment in each position at the publishing date of my stock. In the second edition, I underperformed the S&P 500 by 18.74% primarily due to shipping stocks. I wrapped up my article with the following recommendations with February 13 close prices:

Buy: ARO, BBY, DRYS, ESEA, EXC, EXM, ISH, GME, HPQ, MSFT, NAT, NMM, NOK, PRGN, SBLK

Short: QLIK

My Article Recommendation Results (in order of article from 15-25 August):

I only included Focus stocks and all stocks included in list articles. I strongly frown upon the Seeking Alpha users who produce dime-a-dozen list articles and then cherry pick their winners, so I will stand by my lists and accept the total return. I will include comparisons of $1000 investment into each stock listed.

Value Plays: $449 gain on ARO, $153 increase in DRYS, $85 gain on GME, $171 loss with HPQ, and $191 gain on WMT. Total gain of $707 vs. comparative gain of $670 in the S&P 500. Still long ARO, DRYS, HPQ, and GME. No further position on WMT.

DUK: $181 return on DUK vs. $145 total gain on S&P 500. No further position.

Dividend Growth Tech Stocks: $304 gain on INTC, $258 gain on MSFT, $176 loss on HPQ, $164 gain on IBM. Total gain of $550 vs. comparative gain of $580 in the S&P 500. Still long MSFT and HPQ, no further position on INTC or IBM.

Dividend Growth Retail Stocks: $102 gain on TGT, $54 gain with BBY, $468 gain on GPS, and $478 gain through HD. Total gain of $1102 vs. comparative gain of $788 comparative gain with the S&P 500. Still long BBY and GPS. No further position on TGT or HD.

GME: $61 return on GME vs. $197 gain on S&P 500. Still long GME.

HPQ: $139 return on HPQ vs. S&P 500 return of $216. Still long HPQ.

Discount CEFs: $66 loss with CHN, $40 loss on IFN, and $69 gain through GF. Total loss of $37 vs. S&P 500 comparative return of $525.

AMZN (short): $75 gain from shorting vs. $175 gain on S&P 500. Still short AMZN.

NM: $143 gain on NM vs. $160 gain on S&P 500. Still long NM.

SHIP: $162 gain on SHIP vs. $178 gain on S&P 500. No further position. This company is extremely high risk.

TEU: $193 gain with TEU vs. $178 gain on S&P 500. No further position on TEU, I prefer to invest in DCIX for a pure containership play.

My Total 6-mo Return (Articles from 15 Aug-25 Aug):

$3276 gain vs. S&P 500 gain of $3817. Relative to $23000 "invested" 14.24% gain in 6 months compared to S&P 500 gain of 16.6% // underperformance of 2.36% in 6 months.

Staying Honest:

In this issue, I suffered a slight beating by the S&P 500. While the shipping industry sank and then flat lined, CEFs also had a horrible year. My core value plays and strong dividend stocks strongly performed and helped keep my overall results in a decent zone.

I did not write many articles in September or October so it will likely be a month or longer before I post another update on those positions. If I wrote a 2nd (or 3rd) article about the same stock, I will consider that another $1000 invested in the stock at that price; however, for future follow-ups only the current buy/sell will count. For example: I have credited GME twice in this report, but I will only count my follow-up as one investment from 23 Jan 2012 since that is when I made my formal recommendation.

Therefore, in six months from now, I will consider that I have $1000 long in GPS, CHN, IFN, GF, NM, DCIX and $1000 short in AMZN at February 24 closing prices.

I will have $1000 long in EXM, BBY, HPQ, PRGN, ISH, NMM, ESEA, NAT, and EXC at Feb 10 closing prices.

I will also have $1000 long in ARO, GME, DRYS, SBLK, MSFT, NOK and $1000 short in QLIK at Jan 23 closing prices.

Disclosure: I am long ARO, GME, DRYS, SBLK, MSFT, NOK, EXM, BBY, HPQ, PRGN, ISH, NMM, ESEA, NAT, EXC, GPS, CHN, IFN, GF, NM, DCIX.

Additional disclosure: I am short QLIK and AMZN vs stock and option plays.