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  • Johnson & Johnson Looks Promising on New Product Potential [View article]
    kherman, a few questions if you'd oblige me:

    "The above math for the FCF portion [15*FCF] is basically a DCF when FCF is expected to grow at 8% for 10 years and 4% for the next 20. No FCF after that is in the calc."

    1. That's discounted at ~12% and assumes distribution of FCF or its reinvestment at that rate? What led you to that discount rate?

    2. Why do you add $44b to it rather than stop there? What's the value of unliquidated equity beyond enabling FCF for owners?
    May 25, 2011. 10:19 AM | Likes Like |Link to Comment
  • Why I Bought Lee Enterprises [View article]
    Considering impact of refinancing cost: what's your estimate of Lee's annual free cash flow over the next 3 years if it refinances its ~$1B debt at a weighted average 12.5%, and how do you arrive at that estimate?
    May 23, 2011. 12:21 PM | Likes Like |Link to Comment
  • Len Brecken's Netflix Short Case, Part 1: Is the Company's Accounting Just Smoke and Mirrors? [View article]
    Thanks. I like your supposition about subscriber growth correlated with penetration of the initial and not second Netflix-accessible device. Let's see whether I'm following you:

    A) "If they get to 28mm paying domestic subs by the end of this year, they will have had 76mm gross adds lifetime and 48mm churned. If one-third of Gross Adds are previously churned members, then that is about 50mm unique gross adds."

    That suggests 25m-26m of 28m subscribers would be previously churned members, such that an overwhelming majority of subs are resubscribers, and a bit over half of unique adds are current subs.

    B) "At 10% initial attrition and about 5% churn per month on subs < 1 year, and 1.5% on mature subs, they need to have Gross Adds of about 50% of beginning Subs just to maintain the existing subscriber base…. So to hit and sustain 60 mm subs would take 30 mm Gross Adds every year. Again, that does not seem to be an achievable figure."

    Ok, two questions:

    1) What statements give you confidence that "about 1/3 of new subs are previous Netflix customers?" Was that a statement on a conference call referring to a little period or to several years?

    2) If A) is true, then nearly all members leave the service (all but about 5% per your figures: 2-3m out of about 50m unique adds) and around half of all unique adds stay or resubscribe and are current members. If that pattern is roughly true and holds, setting aside competitive changes and other developments that can disrupt the pattern, may we simply estimate Netflix's reasonably achievable and durable member count as about half its reasonably achievable unique gross cumulative adds?

    Blabbering commentary:

    That could lead to an estimate of perhaps 88%*115m/2 = around 50m household subscribers maximally in the U.S. if some 12% of TV households (wild guess) never try it, plus perhaps an incremental 10m*2/2 = 10m personal subscribers if the top 10% of 100m households who at some point try it pony up for 2 extra personal subscriptions on average (again divided by 2 for that supposed ultimate churn pattern). That'd arrive at 60m subs amidst continuous churn and rejoining, though perhaps markedly less amidst new competition.

    60m*$120/year*14% target margin = $1b pretax annual income in perhaps 4-5 years in that optimistic scenario that disregards competition, assuming a price hike to $9.99/mo. and rather astounding market penetration. If that'd be highly valued at $12B in 4-5 years, and at least 20% annual return would be normal given competitive risks and no floor to downside, then NFLX could fall 50% overnight and still be priced for wild success.
    May 12, 2011. 12:54 AM | Likes Like |Link to Comment
  • Len Brecken's Netflix Short Case, Part 1: Is the Company's Accounting Just Smoke and Mirrors? [View article]
    Analysis in the article is somewhat flawed. Slim Shady's comments appear largely spot on. I have a question for Slim.

    Re. this article first: "It [$1.6b off-balance sheet content obligation] will never get paid, because NFLX simply cannot capture enough subs to ever generate enough pre-tax income to pay for it." Well, it's a flawed statement. The license obligation is like a purchase commitment for inventory. Whether it can be paid depends on Netflix's future revenues, not its future pre-tax income.

    Slim Shady: "Running the math using 10% attrition on Gross Adds and 2% on paying subs greater than 1 year, would mean that paying subs less than a year old would be churning at approximately 4.5%-6% per month (in other words only 1/4 to 1/2 of new adds will make it past one year as a subscriber, and then 20%-25% of those will churn per year after that)."

    Teasing this out a bit, what's your best guess of Netflix's average paying U.S. subscribers in each of the next 10 years? Thx if you take a stab at it.
    May 11, 2011. 12:57 PM | 1 Like Like |Link to Comment
  • Using Options to Handle Netflix's Gyrations [View article]
    "Exclusive Interview with Netflix CEO Reed Hastings: Netflix's Market Opportunity Is A Lot Bigger Than You Think": that was a few weeks before its last earnings release. And that reflects both a "conservative approach to disclosure" and "being equally tight-lipped with all players in all forums"? :)

    Excellent suggestion re. 220 btw. I imagine a demand to investigate the merit of Netflix's market opportunity intimations while insiders sell shares, by seeing the nature of its churn, even only how many once-lost subscribers are in the current subscriber base, may be granted.

    So too might a 220 demand to investigate the consistency and reasonableness of its amortization.
    May 3, 2011. 10:38 PM | 3 Likes Like |Link to Comment
  • Using Options to Handle Netflix's Gyrations [View article]
    Amidst your good questions, I'm a little surprised you haven't focused on Netflix's declination to disclose the nature of its churn, especially how many of its lost subscribers are subscribers now. Cf. my instablog on that and comments under it.

    Incidentally the FMR disclosure you mention may have been filed 4/8 and signed April 6th: merely one day after the Netflix proxy disclosure date. Perhaps it's just a coincidence.

    Negative owner earnings, supplier bargaining power amidst alternative online distribution platforms and undisclosed churn detail -- namely, that only Netflix's insiders know whether its churn more reflects a growing franchise or death spiral -- may be the heart of the matter.
    May 3, 2011. 02:23 PM | 4 Likes Like |Link to Comment
  • Netflix Q1 2011: Imaginary Q&A Series [View instapost]
    Well, I added to our put position Monday before the call with NFLX over $250, and even bought May 250 strike around $15, so I'm not a disinterested observer here. With that out of the way:

    I tend to basically ignore guidance and focus on results. Perhaps Netflix is churning through subscribers in the "death spiral" I described above and in a prior comment (, and will surprise analysts with net subscriber losses in due course as you suggest. I don't know. I suspect Netflx management knows, because they should know what % of subscribers who left have rejoined and are subscribers now. I find it extraordinary that analysts don't clamor for that core disclosure.

    Hastings commented in the Q&A today: "And people do test out the service, come back, go out, go in. And that's fine because our overall growth, our net adds are continuing to increase." It's just a ludicrous remark without quantification: whether it's fine hinges on whether subscribers who left are substantially rejoining or not. Substantial rejoins may look like sustainable growth; low rejoins may look like a death spiral.

    As to the results, Netflix's owner earnings remained negative. Netflix also spent more than 100% of its headline free cash flow to shrink shares outstanding by 0.5%. On one hand, that's like a 2% runrate dividend. On the other hand, it's like a 2% runrate dividend funded by more than 100% of earnings.

    Simple math can illustrate the potential lunacy of its price. Andrew Shapiro offers some such math here:

    In a similar vein, suppose Netflix attains that 60m subscriber count in 4 years, averting the death spiral, and even gets an avg $9.99/month per predominantly streaming subscriber with its target 14% operating margin. That'd be 60mx$120x14% = $1b op, $600m net income. At its current price of over $13 billion, NFLX is over 20x that perhaps near-best-case figure 4 years from now.

    Presuming NFLX owners expect at least 20% annual return given competitive risks, it'd be trading over 40x that perhaps near-best-case earnings in 4 years with fantastic future growth. In other words, it could plummet 50% and still be priced optimistically among the universe of companies with some competition.
    Apr 25, 2011. 11:57 PM | Likes Like |Link to Comment
  • Netflix Q1 2011: Imaginary Q&A Series [View instapost]
    "How likely is it that subs who walked in 2008, resigned in 2009 and walked again in 2010?"

    Or left and rejoined the same year? I don't know. And I don't think we should have to guess about something so fundamental to the growth of a company that markets itself to investors based on its growth. I find it curious when an investment community harbors respect for a management team that refuses to disclose such basic info, and doesn't even persist in asking for it. It's almost like most Wall Street analysts covering NFLX have been lobotomized. Maybe that's a little harsh.
    Apr 24, 2011. 02:25 PM | Likes Like |Link to Comment
  • Netflix Q1 2011: Imaginary Q&A Series [View instapost]
    When there were fewer subscribers who left each year than who joined ([1] above), theoretically *all* subscribers can be ones who left and returned. I doubt most are. This question -- how many current subscribers were counted among those who formerly left -- is obviously material nonpublic information. It also doesn't seem to be among info that companies would reasonably lobby to withhold from reports for competitive reasons. Netflix insiders sell stock while in possession of this key info that can be readily shared. How is that appropriate?
    Apr 24, 2011. 12:37 PM | Likes Like |Link to Comment
  • Netflix Q1 2011: Imaginary Q&A Series [View instapost]
    Hi Rob,

    I didn't post it elsewhere. As to your two items:

    "You make some good points, but this empty attach undermines everything else pretty deeply in my eyes." Well, first of all, the various conference call participants should communicate different points of view :) Actually the line you object to is a sound objection: *of course* there are differences between Netflix and YouTube in revenues and earnings; Hastings' "two fundamental questions" on the basis of which he suggests Netflix can be valued entirely dismisses those differences! He's suggesting Netflix can be valued on the basis of its growth trajectory, which makes no sense in itself. The YouTube comparison lays that bare. In other words, his "two fundamental questions for investors" are horrid and detract from engagement with the investment community on matters of substance like the nature of Netflix's churn.

    Second, yes, I don't know who you are :) Hastings reported selling about 8% of a particular tranche of options (the updated footnote fixed that), and reported 1.267m shares owned by trust, in the noted filing. As to taking any portion of pay in options: decade options may tend to be underpriced by conventional models, they're taxed preferentially, and it's unclear that doubling the cash portion of pay at Netflix would be justified or accommodate cash flow targets. So I have difficulty viewing that as a vote of confidence. Buying stock with most of one's cash comp could be a vote of confidence (or a marketing gesture ahead of a secondary offering). When was the last time a Netflix officer so acted? Cheers.
    Apr 22, 2011. 12:33 AM | Likes Like |Link to Comment
  • Netflix Q1 2011: Imaginary Q&A Series [View instapost]
    S.A. determined this note, including the timely market commentary embedded in "well, look," is not really of interest to investors, as if transcripts of orchestrated conference calls are preferable to more thoughtful discourse. Included in this imaginary Q&A is an observation that what Netflix calls the two fundamental questions for investors to value it are entirely insufficient to value it. Of course S.A. is right: how could that possibly be of interest to investors.
    Apr 20, 2011. 06:51 PM | 2 Likes Like |Link to Comment
  • Chinese Recycling and U.S. Interest Rates [View article]
    "Chinese purchases of US assets are an automatic consequence of the trade balance between the two countries.

    If the US wants foreigners to “lend” it more money, all it has to do is engineer a larger trade deficit. If it wants to reduce foreign lending, it must have a smaller trade deficit. That’s pretty much all there is to it. So warnings about what bad things might happen to the US if China stops buying US government bonds are no different that warnings about what bad things might happen to the US if its trade deficit contracts.

    In other words: it depends. Most of us would assume that a contracting trade deficit is expansionary for the US economy and therefore a good thing. In that case fewer purchases of US dollar assets by the PBoC and other foreigners must also be a good thing because one is simply the obverse of the other..."

    That would all seem true if USD wasn't an int'l currency.

    Chinese purchases of *USD-denominated* assets are an automatic consequence of the trade imbalance. To the extent USD is accepted internationally, China can deploy USD for commodity purchases outside the US, and that USD can remain used in international trade without being invested in Stateside assets. This can render China's -- and then its int'l trading partners' -- decision to purchase US government bonds with surplus USD indeed a decision to some extent, yes?

    That notwithstanding, insofar as the trade deficit is invested in US government bonds in practice, the excerpt appears spot-on.
    Apr 18, 2011. 11:56 AM | 2 Likes Like |Link to Comment
  • If You Must Speculate, Consider Force Protection Inc. [View article]
    "Revised price and value considerations" appear to double count the portion of net working capital you're calling cash. Leaving aside whether non-cash is reasonably deemed cash, it may reasonably hypothetically be viewed as distributed and no longer part of net current assets, or part of assets and part of the purchase price, not distributed and still part of assets purchased, yeah?

    Incidentally we have this one on our watch list and provisionally appraised it near net current assets on account of apparent brand value but no consistent or long-term average quantitative moat (above-average return on capital viewed a few different ways): i.e., around $3.5/share, which might provide a margin of safety in the $2s. (We haven't had any position in it.)
    Apr 17, 2011. 11:39 AM | 1 Like Like |Link to Comment
  • Hollywood Media: Misunderstood and Oversold [View article]
    You had me enamored until the valuation. Based solely on your facts: had roughly flat revenues 2008-2009, less income in 2009 than in 2008, and you're valuing it at over 50x its last reported annual earnings. Perhaps it will merit it. However, that's "to remain conservative"?

    Second, on, with apologies, just a few seconds glance at its last 10-Q, the company expects to incur operating losses in the near-term. Where are these, and the cost of winding up operations, in the valuation?
    Mar 21, 2011. 10:03 PM | 1 Like Like |Link to Comment
  • Star Scientific Just Announced They Cured Alzheimer's Disease and Nobody Cares [View article]
    Perhaps there ought to be some editorial management of patently false headlines.
    Mar 1, 2011. 12:18 PM | 4 Likes Like |Link to Comment