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  • Emulating Buffett: Berkshire's Investment Portfolio by Sector [View article]
    Good concept for an analysis. I'd enjoy seeing you post another article with the same sectoral breakdown including Berkshire's majority owned subsidiaries. Then, for example, utilities wouldn't appear as zero, and you could zero in on how Berkshire's aggregate sectoral allocation compares with the S&P.
    Feb 23 02:47 PM | Likes Like |Link to Comment
  • Calculating Maintenance Cap Ex: Wal-Mart Demonstrates One Method that Makes Sense [View article]
    "The maintenance capex is negative because the PPE% of sales applied to the sale growth is very high. Does this mean that capex has been understated where the maintenance capex was actually $19,099+$5435=$24,535 in 2009??"

    :) I googled this in thinking about Walmart's maintenance capex. The Greenwald calculation doesn't well account for the inflation or pricing component of sales growth vs. unit volume growth, nor operational leverage that can squeeze more volume out of existing PP&E. When either factor is material, it's too simplistic.
    Feb 21 06:40 AM | Likes Like |Link to Comment
  • Netflix, Visa and The Huffington Post [View article]
    In response to two offline questions:

    1. "Comparing Netflix to Huffington Post is reminiscent of a player's recent approach": how?

    The paragraph refers to both companies' superficial appeal rather than what really matters (in the player's case, compatibility beyond outward appearance; for the companies, earnings or valuable equity). Both companies' proponents can say they're unique, attractively innocent of typical industry practice (heavy subscription fees) and exhibit positive energy/momentum. That they sparkle. All of that can be true and superficially irrelevant to what matters in investment: demonstrable earnings or equity, or, and more precisely, reasonable expectation of satisfactory earnings or equity in relation to market price. That is: reasonable expectation of a satisfactory return on investment. That expectation may typically follow from analysis of demonstrated earnings, stakeholders' incentives and competitive position. The paragraph acknowledges superficial appeal and then gets down to valuation.

    2. Can't companies with superb management easily grow into their valuation?

    This question can frustrate bears, especially when companies use stock as currency in secondary offerings or acquisitions. It's in the vein of George Soros' reflexivity: market prices can affect market values. The vice versa may be stronger, as using much stock as currency may signal to investors that management considers its stock no bargain; reasonably expected dividends or ascertainable value support certain prices; and lack thereof provide no floor to price declines.

    Still, even fraudulent management can use pricey stock as currency over a half decade. Experiences like Michael Steinhardt's battle with CUC (his 2001 No Bull pp. 204-6) render concentrated short positions perhaps generally foolish.
    Feb 20 12:52 PM | Likes Like |Link to Comment
  • Netflix, Visa and The Huffington Post [View article]
    Thanks for your thoughts.
    Feb 12 10:25 PM | Likes Like |Link to Comment
  • Netflix, Visa and The Huffington Post [View article]
    "Most all his bearish conclusions are predicated on deep pocketed, crippling competition taking large swaths of NFLX's earnings/sub growth/margins."

    The bearish conclusions are based on market price relative to financial results plus the prospect of competitors constricting Netflix's potential earnings growth.

    Notable in many bullish retorts to various NFLX columns: no attempt to value it. If you think it's a bargain at $12 billion, how are you thinking about it? Do you think it will soon generate well over $1 billion annual owner earnings (net income plus depreciation and amortization minus capitalized expenditures including streaming content acquisition: i.e., the earnings available to owners)? By what simple math do you arrive at over $1 billion annual owner earnings at Netflix soon? If you’re not reasonably certain that it will generate a solid owner earnings yield on a $12 billion price tag, how can you consider it a reasonable investment?

    "I feel Mr Global is short NFLX."

    We are not short NFLX and have never been short NFLX. We've owned 2013 put options on NFLX since November or early December 2010 (depending on whether we're counting trade date per convention or settlement date). We refers to a limited partnership and a few separately managed accounts that I manage, not all. Indeed owning put options bears comparison to being short, but you needn't guess our position in any company we write about here: we disclose it.

    "The author has problems with owner earnings arising from operations. Yep, it's not a pristine report, but I'm sure the author would agree that some data point to continued success. I especially like these: 1) Return on equity of 65%"

    The author would disagree. The numerator of return on equity: earnings. The earnings that matter: owner earnings. Netflix exhibits negative owner earnings. That means a negative return on equity using the numerator that matters. Growing revenues and bleeding red with high customer turnover doesn't strike me as a reasonable definition of continued success.

    Netflix should have potent wind at its back this year as noted in the prior article. That includes the Starz deal and arguably no direct competitor yet. That should enable Netflix to grow gangbusters or earn unusually boatloads this year relative to future years. It could also execute a few brilliant moves that turn it into a formidable competitor. There are seeds of potential greatness in many companies with a large customer base and even-transient advantages.

    Netflix hasn't established a formidable moat (durable competitive advantage) yet. That leaves only its financial results. And NFLX is not demonstrably fundamentally worth anything on that basis. To the rejoinder of price action, kindly see #4 above.
    Feb 12 10:21 PM | Likes Like |Link to Comment
  • Netflix, Visa and The Huffington Post [View article]
    "Actually, since Netflix has 40x revenue, you can multiply Huffington's price tag by 50 and get $12B"

    I see you’re saying that in jest. Lest anyone reason similarly: of course it'd be logical if all companies are worth the same multiple of revenue. A casual glance at the S&P 500 may disabuse anyone of such suggestion. So too may the thought experiment that Netflix could offer its content on a consignment basis for a 10% commission with flat subscription fees divvied up to suppliers in proportion to minutes of any supplier's entertainment consumed as a percentage of the total. Then subscribers would pay the same amount for the same service while Netflix's profits may be similar and its revenues 1/10th what they are now. In summary, naturally valuation tends to hinge on the bottom line, not the top one.

    "That just goes to show how unreliable numbers are when taken out of context."

    You seem to imply agreement with my prior paragraph but take issue with comparing Netflix to THP at all. Netflix and The Huffington Post are consequentially similar in their competitive positions constricting potential earnings growth, besides serving about the same number of customers in online entertainment. I would bet even money that Huffington Post generated *more* owner earnings than Netflix in CY2010. If you could inherit one of two businesses with challenging competitive outlooks, would you prefer one that generated more revenue last year or the one that generated more veritable earnings in the last half year and year?

    "Instead of comparisons to Visa, Huffington Post, or anything else out there, I'd rather read articles that focus on the company itself, its issues, and long term strategic plan; possibly with a flavor of financials which you have done in the past."

    Fair enough. This article was a response to Rob Fagen's "Visa: Netflix's Future" article that called us out a bit in a courteous way.
    Feb 12 10:14 PM | Likes Like |Link to Comment
  • Netflix, Visa and The Huffington Post [View article]
    Peace.

    1. Please construe our disclosed actions as probable facts and my comments as observations or suggestions, not advice.

    2. We started buying longest dated put options on NFLX about Nov 30, 2010 based on reasoning in the prior column.

    3. We must disagree with market opinion about our portfolio constituents if we are to beat the average market return.

    4. We don't consider ourselves right or wrong based on whether others agree with us, including the balance of opinion reflected in market prices over any few days, weeks, months or few years.

    5. Market operations premised on liquidating any position before others may face the headwinds of relatively frequent trading costs and taxes; potential devastation if liquidity disappears; and (paraphrasing Keynes) an unsettled mind.

    6. If a fundamentally pricey security rises from $150 to $250 before falling below $100, we don't consider sitting out the move from $150 to $250 an opportunity cost. We deem it intelligent inaction that averts #5 headwinds.

    7. Long-short operations can afford only three of four general price moves in their long (L) and short (S) positions: L and S generally rise, L and S generally fall, or L generally rise and S generally fall. They cannot withstand L materially falling while S materially rise. Consequently they may worry about short-term market action even if it's substantially unpredictable, and deem dramatically adverse short-term market action tantamount to being wrong. They need to potentially trade with the crowd rather than omnipresently independent of it. They are among #5. We are not.

    8. Nor are we omniscient or free of misreasoning. Whitney Tilson noted in his "Why We're Short Netflix" article here, "we've found that when we publish our research, we often get valuable feedback. If there's information or analyses that would cause us to change our views, we want to hear about it!" We do too. That excludes any comment about price action. Cf. #4.

    Re. Mr. Tilson's "Why We Covered Our Netflix Short" article, MyEnforker's comment looked apropos.
    Feb 12 10:10 PM | Likes Like |Link to Comment
  • Netflix, Visa and The Huffington Post [View article]
    You're very kind.
    Feb 12 10:05 PM | Likes Like |Link to Comment
  • What Do You Get When You Buy Netflix? [View article]
    "I won't dwell on other glamorous businesses that dramatically changed our lives but concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and televisions, for example. But I will draw a lesson from these businesses: The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."

    money.cnn.com/magazine...
    Feb 6 12:35 PM | Likes Like |Link to Comment
  • What Do You Get When You Buy Netflix? [View article]
    Hi Rob, thanks for the props. The challenge in having stock discussions with thoughtful qualitative commentators: financial analysis is taken off the table. Your article reminds me of some wonderful businesses with exceptional customer service, hiring practices and innovation. They just weren't worth 500 million dollars, let alone $11,000,000,000.00.

    You suggest Netflix exhibits consistent earnings growth. My article you reference notes that Netflix exhibits negative owner earnings.

    You suggest "a great deal of those [customers] that leave eventually come back." Do you have any 2010 data to back that statement? Are over 25% of all Netflix subscribers who at one time left the service now again Netflix customers? If the answer is no or unavailable, how is this conjecture reasonable or meaningful?

    To your reply in comments under my article, I jotted simple thoughts on hedging/lightening a NFLX stake if we can't rule out the possibility that the call option on its negative owner earnings growing materially -- i.e., the NFLX stock price -- may be worth closer to $500m ($9/share) than $10 billion ($185/share) before acquisition or secondary offering.
    Feb 4 12:40 PM | 2 Likes Like |Link to Comment
  • Netflix: Dismal Owner Earnings, Priced to Plunge [View article]
    It's good to have friends and to be priced near the lowest priced competitor. If any online behemoth beats Netflix in distribution cost, NFLX margin expansion may be constricted. Investors can test that by calculating Netflix's owner earnings per the image above over 2011-13, and seeing whether its trailing twelve months of earnings durably exceeds a 3% owner earnings yield on a $150/share market cap (around $270m TTM owner earnings before net share issuance).
    Feb 4 10:15 AM | 2 Likes Like |Link to Comment
  • Netflix: Dismal Owner Earnings, Priced to Plunge [View article]
    Leverage cuts both ways, of course. Netflix's margins may become higher or lower from lower cost of physical fulfillment, higher cost of streaming content and lower revenue per subscriber. Reed Hastings addressed this well in noting that nothing "inherent in the cost structure" enables weak or strong margins. Netflix's margins will hinge on its value added and barriers to competition, not whether costs of delivering streaming content become higher or lower for all streaming competitors. If some competitor offers a similar package for $6.99/month, then Netflix may have difficulty raising or even maintaining pricing and see its earnings *decline* by $240m+/year. If content costs necessitate $9.99, $19.99 or even $29.99/month for acceptable streaming service in due course, revenue increases won't necessarily benefit earnings. It's nothing "inherent in the cost structure" but competitive position that will enable durable margin growth or not. And in moving from DVD rentals to online streaming, Netflix appears to be moving from big fish in a small pond to small fish in a big pond. Amazon, Apple, Facebook and Hulu weren't Netflix competitors before. Now they are. And most of them are stronger than Netflix in customers, resources and diversified revenue streams. Netflix might win, but it's a challenge that doesn't appear to warrant an $11 billion price tag for potential owner earnings growth that may be nil.

    Because that switch to the $7.99 plan began in Q4 and you consider that switch to benefit Netflix margins, should we consider it to have favorably impacted Netflix's Q4 owner earnings?
    Feb 3 06:30 PM | 3 Likes Like |Link to Comment
  • Netflix: Dismal Owner Earnings, Priced to Plunge [View article]
    Almost :) Obviously there are many people on both sides of this one, including other Seeking Alpha authors and commentators above. If bullish NFLX analysts have furnished a reasonable thesis of Netflix's future owner earnings or free cash flow relative to its market price in your view, kindly share it with us.
    Feb 2 07:27 AM | 6 Likes Like |Link to Comment
  • Netflix: Dismal Owner Earnings, Priced to Plunge [View article]
    Thank you. And thanks for the other kind/helpful thoughts above, MyrEnforker, joey554, Stephen Frankola, billddrummer, XRTrader, Milkweed and more.
    Feb 2 07:06 AM | 3 Likes Like |Link to Comment
  • Netflix: Dismal Owner Earnings, Priced to Plunge [View article]
    Hi Rob, thanks for your thoughts --

    "I don't know if this is still good information, but my past experience is that defecting customers *do* frequently come back to the service."

    That would be very interesting to know: a sort of "net churn" statistic.

    As to the numbers that would support a bullish Netflix thesis, it may simply boil down to sustainable pricing power. For example, if Netflix could soon double its streaming subscription cost without losing customers dramatically or increasing spending dramatically, it could have a very valuable business.

    The question, of course: what competitive position would enable that. You mention three possibilities: advantage in infrastructure, product development and content acquisition. I don't know about infrastructure advantage when it hosts at Amazon. I wonder whether Amazon's experience hosting for Netflix provides it data to price its own streaming service, and in any case to match or beat Netflix in delivery cost. It's also difficult to consider companies like Google disadvantaged vs. Netflix in technical infrastructure more than transiently. Product development at Netflix is indeed impressive, considering attractions like a Netflix button on various remote controls. As noted, its user interface can improve.

    We seem to agree that relative power in content acquisition may be most important to Netflix's future margins. I don't see how it clearly gets better deals on an ongoing basis than competitors with more resources like Amazon, Comcast, Walmart, etc.

    This article was submitted before news of Amazon potentially launching a Netflix competitor emerged. I think Netflix has benefited from having no direct competitor: Hulu is dissimilar in peppering its shows with advertisements, and others are more expensive a la carte options. "Nobody [else] has licenses that allow for a profitable all-you-can-eat plan [without ads]," you noted in an instablog post. It sounds like Amazon may change that.

    Our supposition in the article: non-exclusive licensors to Netflix may change it themselves by banding together on any platform like Amazon, Apple or Facebook if Netflix's streaming margins ever become substantial. Its DVD distribution business was a good one: not easily replicated. If its streaming service is readily replicable, Netflix's non-exclusive content licenses may be an achilles heel.

    To be fair, I see capital raising and deal-making scenarios under which Netflix could become a valuable business. Clearly 100% of its value lies in future owner earnings growth if any, however. If the competitive threats aren't insignicant, perhaps $500m would be a more sensible price than $11 billion for the call option on Netflix withstanding competitive threats to emerge as an advantaged behemoth in Internet streaming with durably valuable pricing power.

    If that's fair, then NFLX would be fairly priced on a ~ 95% decline. If you lighten up on a NFLX stake over $20/share ($1 billion valuation of potential earnings growth), I would view it as prudent regardless of how the future unfolds. If you lighten up over $200/share, I would view it as superbly prudent regardless of how the future unfolds.

    If you think Netflix will likely but not certainly dominate online streaming and own NFLX, you could buy 2013 strike $200 puts <$50 to watch it unfold without concern. Or you could sell the stock at $210 and buy NFLX 2013 strike 200 calls at $60. That'd lock in a potentially extremely overvalued $150/share and preserve upside if Netflix does splendidly.

    For what it's worth, factors like top decile valuation by conventional metrics, deteriorating cash flow excluding working capital changes, reduced sales and marketing spend that meets eps targets, significant insider selling without insider buying amidst corporate stock buybacks, corporate stock buybacks at top decile valuation, above-average short interest, and a few other fundamental indicators exhibited by Netflix may be correlated with subsequent stock price decline on average. Granted, just on average. We may agree its ultimate performance boils down to its future competitive position.
    Feb 2 06:01 AM | Likes Like |Link to Comment
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