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Slim Shady

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  • Amazon Earnings Preview: Best Secular Growth Story In Retail, But... [View article]
    "AMZN's operating margin the last two years - as a function of the distribution center build-out and the investment in other areas - is now close to 1%, while in a normal operating environment, AMZN's operating margin is 4% - 5%."

    What data do you have that shows that AMZN is "overinvesting" with expenses by $1.9 to $2.5 billion per year, (which is 3%-4% of the $63 billion of revenues they are expected for the year)?

    The one data point that is out there is that AMZN is subsidizing shipping costs to the tune of 4.8% of revenues. Is this the investment you speak of? Or is this the way they are able to continue growing revenues at the expense of profitability? Is the ultimate goal to drive every brick and mortar business into the ground, then raise shipping charges to achieve this "normal operating environment"? What happens to their revenue growth when they have to charge sales tax and charge the true cost for shipping? Even if you assume that they are able to achieve these allegedly normal margins, it is still trading at 20x EV/EBITDA vs 8.5x for WMT.
    Oct 23 01:03 PM | 1 Like Like |Link to Comment
  • Is Netflix Really The Disaster Everyone Thinks It Is? [View article]
    From your link, you say that EV/EBITDA is 2.6x, Cash Flow is 3.1x, and P/E is 15.9x. These are simply not correct. You can either be defensive about it or try to learn something. I've been doing this for longer than you've likely been alive and know the inner workings of this business through its numbers inside and out. A little humility from a 20-something year old who is still in business school will serve you better when you enter the real world.
    Oct 10 10:56 PM | 2 Likes Like |Link to Comment
  • Is Netflix Really The Disaster Everyone Thinks It Is? [View article]
    Unfortunately Rupert, none of the numbers that you are using to come up with your valuation are accurate or relevant. It doesn't matter how many models you use, Garbage In gets you Garbage Out. Guess they're not teaching that at business schools any more. A few words of advice, do you own work, never rely on a third party source for your data when it is available first hand, and understand what the numbers are and what they mean. Good luck to you.
    Oct 10 03:55 PM | 5 Likes Like |Link to Comment
  • Netflix: Don't Buy Into A 40% Rally [View article]
    Freekizh - You think technology and development is discretionary? The fact that you think their DVD business loses money, when it accounts for at least 90% of domestic profitability tells me you really don't know anything about the company. If you read their 10-K, you would find that...

    Technology and Development
    Technology and development expenses consist of payroll and related costs incurred in making improvements to our service offering, including testing, maintaining and modifying our user interfaces, our recommendation and merchandising technology, as well as, telecommunications systems and infrastructure and other internal-use software systems. Technology and development expenses also include costs associated with computer hardware and software.

    From Their Risks Section:
    Our proprietary recommendation and merchandising technology enables us to predict and recommend titles and effectively merchandise our library to our subscribers. We also develop, test and implement various user interfaces across multiple devices, in an effort to maintain andincrease subscriber engagement with our service.

    If our recommendation and merchandising technology does not enable us to predict and recommend titles that our subscribers will enjoy or if we are unable to implement meaningful improvements thereto or otherwise improve our user interfaces, our service may be less useful to our subscribers. Such failures could lead to the following:
    • our subscriber satisfaction may decrease, subscribers may perceive our service to be of lower value and our ability to attract and retain subscribers may be adversely affected;
    • our ability to effectively merchandise and utilize our library will be adversely affected; and
    • our subscribers may default to choosing titles from among new releases or other titles that cost us more to provide, and our margins may be adversely affected.

    We rely heavily on our proprietary technology to stream TV shows and movies and to manage other aspects of our operations,
    including processing delivery and return of our DVDs to our subscribers, and the failure of this technology to operate effectively could adversely affect our business.
    Oct 10 10:57 AM | 1 Like Like |Link to Comment
  • Netflix: Don't Buy Into A 40% Rally [View article]
    At $55, it was only 10x domestic earnings assuming that you allocate $200 million (approx 60%) of the Technlogy and Development costs to Domestic and $140 million to International, even though International revenues at 1/10 those of domestic. If you think those costs are completely discretionary you're dreaming.

    Of that domestic profit, 90% of it was from the DVD business, which has been declining at a rate of nearly 10% per quarter. What other business with a 10% decline rate per quarter has a 10 p/e? Gamestop Operating Income is declining 12% year over year and has a P/E of 7.4x. Best Buy Operating Income is declining 15% year over year and has a P/E of 5.7x. There is no way a standalone DVD business that is declining as rapidly as NFLX would have a 10 p/e. Since about $4.75 of those earnings are DVD, that would leave about $0.60 of Domestic Streaming EPS, assuming only 60% of T&D costs were allocated to it. If Domestic DVD had a 5 P/E, then the Streaming EPS would be at 50x earnings - hardly cheap. At the current price of $73, it would be 83x domestic streaming earnings.

    As far as that "upside optionality" in the international business, that is hardly free. In fact, assuming the allocation of T&D from above, it is costing them over $500 million per year, or $8.50 per share, or in other words 15% of the equity cap when the stock was at $55 per share. That is one expensive free option considering that Canada allegedly had barely gotten to breakeven contribution profit spending far less than they are spending to enter Lat Am and the UK. And that breakeven doesn't consider the T&D and G&A costs that it takes to be in those markets.

    The recent run-up based on no new news is a pump of the stock by the sell side (Citi/Morgan Stanley) prior to what is likely to be another disappointing earnings release, so that the hedgies can establish their shorts.
    Oct 9 09:04 AM | 6 Likes Like |Link to Comment
  • Will Amazon Ever Be Able To Open The Earnings Floodgates? [View article]
    Demoridin - Start to imagine...Per their 10K, shipping revenue, which "includes a portion of amounts earned from Amazon Prime memberships", was $1.552 billion. Shipping Costs were $3.989 billion, so their net shipping cost (or subsidized shipping) was $2.437 billion, or 5.1% of Total Revenues.

    For the first 6 months of 2012, net shipping cost was $1.253 billion vs. $944 million in the previous year - both 4.8% of revenues.
    Oct 4 11:59 AM | Likes Like |Link to Comment
  • Nattering Nabobs Of Netflix Negativism, Revisited [View article]
    wzagieboylo - plain and simple, he was wrong:

    From his Feb 11, 2011 article:
    In mid-December, we published a lengthy article on why Netflix was our largest bearish bet at the time (price of $178). With the stock up nearly 25% since then, one might assume that we’d think it’s an even better short today, but in fact we have closed out our position because we are no longer confident that our investment thesis is correct. At todays closing price of $222.29...

    From T2 Partners letter to Partners on 10/26...

    Dear Partner,

    We established a position in Netflix yesterday after the stock crashed 35% (closing price was $77.37). We will discuss it at greater length in our monthly letter next week, but in case you read about it before then, we wanted to assure you that we haven’t lost our minds. We simply think it’s a good company and that the market has over-reacted to all of the recent negative news, thereby providing us the chance to own it at a cheap price.

    "We think Netflix can earn $5-6 of contribution margin per customer per month (a bit less than half of average revenue of approximately $12.50). This translates into $1.3-$1.7 billion of operating profit (excluding Netflix’s nascent international operations), for a company with a market cap today of just over $4 billion."

    Since he didn't indicate a timeframe, maybe he still has a chance. However, domestic ARPU in Q2 was only $10.45 per month per average unique domestic sub and declining ($11.00 without including the free "subscribers"). Contribution Margin was $2.75 per paying sub or 26% of revenues. However, he excludes the $1.25 of Tech & Development and G&A costs per sub in the quarter, which would be a component of getting to operating profit. So domestic operating profit would be $1.50 per sub/month. In effect, this translates to annual operating profit of not quite $500 million, with all of that coming from the declining DVD business. The increase in contribution margin from Streaming is barely outpacing the decline in contribution margin from DVD.

    Those "nascent" international operations are on track to have a negative contribution margin of almost $400 million this year alone, and that doesn't include any allocated Tech & Development, or G&A which would push that number north of $400 million. Not an insignificant amount given their $500 million of DVD operating income that declined from $194 million of contribution margin in Q4/11 to $133 million in Q2/12.

    "We think Netflix was smart to raise its price – our only quarrel is how Reed Hastings communicated it."

    ARPU per unique domestic sub before raising its prices was $11.49 per paying sub. Last quarter it was $11.00. Not much of a price increase.

    Tilson's analysis for his purchase was weak and he based his valuation on a) an incorrect Operating Profit assumption, b) a "per subscriber" valuation comparing it to other media companies, even though those other subscribers profitability is significantly higher than Netflix, and c) the pure hope of an acquisition by Disney, Google, Amazon, or Apple.
    Oct 4 07:33 AM | 2 Likes Like |Link to Comment
  • Nattering Nabobs Of Netflix Negativism, Revisited [View article]
    That is the same Mark Mahaney that reiterated his top rating of 1 with a $300 price target on July 25, 2011 after Netflix released 2nd quarter results when the stock price was $253, with the 10% after market correction creating an "enhanced opportunity". He completely bought into the company's $1 billion of Q4/2011 revenue, which ended up being only $875 million and will not reach $1 billion in any quarter of 2012.

    He states that NFLX is "generating almost $5.50 in U.S. EPS in 2013. That means one can buy NFLX U.S. at 10X P/E, with a free call option on NFLX International. That's highly reasonable, in our opinion."

    The problem with his view is that the majority of that U.S. EPS is still derived from the DVD business, which is sinking rapidly. After allocating Technology & Development, which I would argue very little should go to the dying DVD business, and G&A, the domestic steaming effort is still losing money. The International business is not a free call option either since it will generate losses of over $400 million this year - or almost $7 per share (pre-tax). Losses in this business show no sign of abating.

    His $120 price target is based on 30x 2013 EPS for domestic streaming, 10x 2013 EPS for domestic DVD and 30x "normal" EPS for International. His shows values of $66/sh for Domestic streaming, $32 for DVD, and $16 for International.

    With proper allocation of Tech & Development, and assuming all of his other operating data is accurate - I would argue his streaming revenue of $2.7 bln and contribution margin of 18% are optimistic), Domestic Streaming would earn about $1.10 per share for value of $33.

    Domestic DVD would earn $3.66, which his assumptions seem to show that the DVD business stops losing customers and is able to maintain its contribution margin. He argues for a 10x P/E, yet it is a declining business. A good comp for this segment could be Best Buy, which trades at 5.5x EPS. Using this multiple provides $20 of value.

    The International business is a disaster as they continue to lose over $100 million per quarter after allocation of all costs. To say that this business has any positive value at this point, let alone $16 per share, is ludicrous, since they are spending nearly $7 per share per year in losses to launch. It is not a "free" call option, when you have to pay significantly for that option year after year.

    What is certainly even more confusing is that they were able to enter the Canadian market with total direct spending (marketing and content) of less than $28 million per quarter, yet the addition of Lat Am and UK has caused direct quarterly losses of $90-$100 million per quarter with Canada allegedly break-even. They were able to generate $19 million of quarterly revenues with $28 million in Canada, yet it has cost them $126 million per quarter to generate the last $46 million of revenues after entering Lat Am and the UK. We really don't know how they allocate costs between Domestic and International, but any costs that are assigned to International, would make the Domestic streaming business metrics look that much better.
    Oct 3 01:30 PM | 6 Likes Like |Link to Comment
  • Nuttiness About Netflix In 2022? Please Make It Stop [View article]
    Tilson's illogical arguments regarding his long position in Netflix almost makes it seem like he is trying to pump up the stock so that his hedge fund buddies can get more attractive points to set up their short positions.
    Oct 2 11:30 AM | Likes Like |Link to Comment
  • Nuttiness About Netflix In 2022? Please Make It Stop [View article]
    Well said Marek.
    Oct 2 10:25 AM | 1 Like Like |Link to Comment
  • The Truth About Amazon's Margins [View article]
    The "truth" is, the last $40 billion of AMZN revenue growth has been completely profitless. That is a problem with a business model. When Wal-Mart grew revenues from 16 billion in 1988 to 55.5 billion in 1993, (over the same timeframe AMZN has grown it's revenues by a like amount), net income margins went from 3.9% to 3.6% (incremental margins of 3.5%), not to almost zero.
    Oct 1 10:25 AM | 5 Likes Like |Link to Comment
  • Amazon: Sales Taxes And Getting Cozy [View article]
    "At first glance, Amazon's collecting sales tax appears to be a disadvantage. However, collecting sales tax enables Amazon to build its distribution centers closer to its customers, having the effect of reducing shipping costs and delivery time."

    That's teriffic news - now they get to charge customers an effective price that is 6-8.5% higher AND spend money on bricks and mortar infrastructure. If this is such a benefit to them, why didn't they voluntarily build the distribution centers in those states and collect sales taxes before?
    Sep 28 11:33 AM | 8 Likes Like |Link to Comment
  • The Truth About Amazon's Margins [View article]
    You had time to comment on everyone else's comment - except mine, then when you do comment on mine, you don't refute the facts I presented, because you can't. Again, you wrote the article to correct gross misstatements, but just because you say over and over there are gross misstatements of fact does not make it true. Debate over - there will be no next time, I've got better things to do than to engage in discussion with someone that adds no value.
    Sep 28 08:44 AM | 4 Likes Like |Link to Comment
  • The Truth About Amazon's Margins [View article]
    Marc - why didn't you refute the facts that I presented - you seemed to have a reply for every other comment except mine. That's because the FACT is that the last $40 billion of revenue growth has been profitless, the FACT is that they have subsidized shipping, passed along all the sales tax benefit and they still haven't made any incremental profit on the last $40 billion of revenue. The FACT is WMT was able to invest in their business - growing the same amount from 1988 to 1993 without sacrificing profits. You give management a complete pass on their "delivery infrastructure" expenses - yet have no DATA to back that up - it is a FACT that long-life infrastructure costs would be capitalized.
    Sep 27 12:09 PM | 4 Likes Like |Link to Comment
  • The Truth About Amazon's Margins [View article]
    The "truth" is, the last $40 billion of revenue growth has been completely profitless. That is a problem with a business model. When Wal-Mart grew revenues from 16 billion in 1988 to 55.5 billion in 1993, (over the same timeframe AMZN has grown it's revenues by a like amount), net income margins went from 3.9% to 3.6% (incremental margins of 3.5%), not to almost zero.

    " You cannot have a problem with the business' margin characteristics. These are fine."

    Their margins would be in line with Wal-Mart, had they not subsidized shipping costs to the tune of $2.4 billion in 2011. However, how would it affect their sales growth if customers had to pay 5% higher prices than they did. 5% subsidization on a buisness that generates 0.7% net margins is a problem. They also have a built-in cost advantage because they don't charge sales tax in most jurisdictions, so in theory, their margins should be much higher than Wal-Mart. They have made the strategic choice to do away with margins in order to grow revenues. You have no idea what revenue growth would be if they charged for actual shipping costs to generate margins comparable to Wal-Mart and didn't have a sales tax advantage.

    "The expected loss with Amazon relates to heavy spending on digital initiatives, delivery infrastructure, etc. "

    Do you believe this because this is what the company told you? What exactly does that mean? Digital initiatives - like spending a lot of money on streaming content to provide as an add on to the Prime membership, a business that Netflix cannot make profitable with 25 million paying subscribers? Delivery infrastructure would be capitalized if it had a long life. Delivering products by charging less than what it costs you does not build long-term value.

    Ignoring facts, which your article does completely, is "out-and-out nonsense". Just because you say it is nonsense 3 different times does not make it so.
    Sep 26 04:25 PM | 6 Likes Like |Link to Comment