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  • Netflix....I just don't see it! 0 comments
    Feb 2, 2011 1:58 AM | about stocks: NFLX

    Can Netflix sustain the growth needed to justify its high valuation? I don’t think is very hard to see future sustainability and certainty about its growth prospect. one can really short this stock without feeling the hesitation. This has become one the most exciting stock to watch. Here’s a company with 25% short interest, sharp division on bulls and bears, and target price ranges from 70s to 270s. Every short seller has felt the pain in the past year.

    However the growth story isn’t without holes...
    1. Contents: My personal experience with streaming Netflix doesn’t offer many GOOD movies, but it’s great to watch some of the OLD shows. At the end of the day, Netflix needs to keep subscribers by getting better content. One can only hold on to old library for so long.
    2. Cost of contents: Since major content provider won’t budge, Netflix will probably enter into more expensive agreement (even with Starz when that contract expires next year) as it expands its content available to stream.
    3.Cost of subscriber growth: Netflix has been expanding its marketing, technology expense to attract new subscribers. Main marketing strategy includes new devices to receive streamed content and expanded promotional subscriptions: Need more tech development and need more FREE accounts. This translate to downard pressure on not only Operating but also Gross Margin.
    4. Margin: Netflix did successfully increased subscription cost by $1 per month across the board. That can translate to the Avg Rev per Subs month to 13.90 from 12.90.
    4a. Increased number of cancellations (31% growth per year)
    4b. Increased number of free subscription (50% growth per year)
    4c. With the increased in sub revenue, there’s a significant risk in paid subscription to be flat or even decline.

    Management guided that they want to see the operating margin to be at 14%. Netflix will have add another 14.5 Million (80% growth) new subscribers given the trend of cancellations and free subscription growth.

    No matter how unlikely it seems, short sellers continues to get crushed by at every tick up. I do agree that Netflix is in very capable hands. Reed Hasting has proven time and time again to be making the right strategic moves. Management has been proactive and successfully plan ahead to move Netflix away from its traditional mail in DVD business model to its the faster growing online streaming business. The future pipeline from new access to Netflix access are in place such as Xbox, Wii, and TVs. Netflix is set for expansion on accessibility. Is it really worth 61x forward earnings? Yes it's possible I'm working some fuzzy math here and some wild predictions (VERY possible). I guess we'll have to see...

    Stocks: NFLX
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