By: Jonathan A. Parker
Disclosure: QuantX Capital, LLC owns NFLX
Video for Thought
So beginning to tackle the beast we call NFLX isn’t easy. Hell, most fund managers won’t even comment on NFLX, but I am not most fund managers. For full disclosure purposes, I have shorted NFLX at 200, 250 and finally 300. I covered my net short positions at 205 and made a nice profit; however, I wanted to wait to see what CEO Hastings would do with this company before initiating a long position again. To my dismay and the grumblings of investors and subscribers across the world, NFLX is flip-flopping all around in terms of price, in terms of content and in terms of global expansion. Finally, last Monday, the cat was out of the bag; Hastings said that they would expand into new markets in Europe and that the next two quarters will not be profitable for their firm. However, it is important to note that NFLX can stop the expansion at any time and can go back to $4 to $5 per share earnings whenever they want, so the choice is theirs. Also, NFLX is making some good content additions for the streaming side of the company. Hastings clearly feels that the future of video content is streaming and he is positioning the company to be the “trail blazers” of this segment. Just like the late Steve Jobs positioned Apple to be the leader in consumer electronics such as the iPhone, iPod, iPhone, hell anything with an I in front of it, Hastings is doing the same with NFLX. So with a bit of background behind us, I will expose why we are long NFLX and what a streaming hot stock this could be for your portfolio.
Inside the Numbers
NFLX is a company that is in transition and their story is ever evolving. Based on consumer demand and the overall space for streaming video, the Subscriptions should remain strong. After Monday’s report, it was clear that NFLX has lost some subscribers with the debacle over the mail service and streaming service split, the increased fees and the way the company’s management handled the transition. The current count of subscribers is 22M+, which is down from 25M+ before the Quickster disaster and Hastings’ personal meltdown. That being said, the key metric for analyzing NFLX is the amount of current subscribers and the rate that they are adding new subscriptions. Keep in mind that NFLX is now available on gaming consoles, TV’s, DVD players and even some cable boxes making it easier for people to use this service. A $7.99 a month fee for unlimited streaming movies or shows is quite attractive and adds to the consumer’s entertainment choices. As mentioned before, with the loss of 3M subscribers the stock has tumbled from 300 a share to 84 a share. So imagine if they can get back the 3M subscribers and add another 3M more. The key to this happening is the holiday season that is fast approaching. Electronics are in high demand during this retail cycle and inevitably NFLX will be available on these devices that are purchased. I believe they can turn this around in a 6 month period, and their holiday subscriptions will make up for the Quickster slip.
The Chart Says BUY
NFLX has broken down key technical levels below and is in the danger zone of heading lower; however, the story that money managers fell in love with has not changed. The future of this firm is streaming and at these levels the charts are yelling BUY. Here is the 6 month chart for NFLX.
Thesis for the Trade
At QXC we initiated a long position at 108 a share before the earnings report, and that might have been a bit too early. We then went 4 over at 72 a share and thus the QXC Fund is sitting in the money by $2 or so. Here is how we are playing this one from here; hold long to 100, then take off half. NFLX will get the subscriptions back to 25M based on the holiday season, as well as promotion from the Quickster fallout. Also, NFLX is expanding into Europe and this will eat away the earnings, but the long term money managers will see the 12 to 24 month value in this approach. When investing, it is key to always follow the big money, for they direct the markets direction. I look for NFLX to sit at 100 by the end of the year and we have a 2012 price target of 210 a share. This gives tremendous upside potential with very little downside risk. NFLX is a company that has amazed the best traders on the street and has mesmerized the savviest of investors, but make no mistake about it, this stock can be dangerous. I think at 84 a share; everyone should stream their portfolios into 2012 with Hastings and NFLX.