Seeking Alpha

Netflix turns negative, S&P cuts shares to Sell

  • That "momentum investor-fueled euphoria" Reed Hastings (NFLX -4.1%) referenced in Netflix's Q3 shareholder letter is dissipating just a bit today, as investors take profits in spite of strong Q3 U.S. and international subscriber adds, and above-consensus Q4 EPS guidance. Evercore has upgraded shares to Equal Weight, but S&P has cut them to Sell.
  • Two possible concerns: Hastings' remarks about "low quality" Latin American free trial promotions boosting Q3 international adds, and the fact free cash flow fell Q/Q to $7M thanks to major content investments. Of course, shares remain up 268% YTD.
  • Janney's Tony Wilbe remains quite bullish, arguing shares could reach $700 with the help of continued sub growth and a $1/month price hike. JPMorgan's Doug Anmuth has raised his PT all the way to $460 from $340, and Needham's Laura Martin (Buy, $425 PT) thinks margin expansion is ahead of schedule, given Q3 margins hit estimates in spite of an extra $27M in amortization costs.
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Comments (33)
  • Bill Maurer
    , contributor
    Comments (5468) | Send Message
     
    I believe S&P raised their target to $365, so right now they are telling you to Sell a stock that they think will rise $25 from current prices.
    22 Oct 2013, 11:08 AM Reply Like
  • Water Brothers Financial Co...
    , contributor
    Comments (379) | Send Message
     
    Tthere you go again - taking every side. Are you a buyer or seller today and what is your target - go on record. By the way, they will probably subsequently lower their target but these discrepancies happen all the time with buy side analysts. What is your 12 month target?
    22 Oct 2013, 11:40 AM Reply Like
  • Bill Maurer
    , contributor
    Comments (5468) | Send Message
     
    I'm not taking every side. I'm pointing out the facts. They have a Sell rating, but a $365 price target. The stock is at $340. That means $25 of upside.

     

    I don't know where you started this personal vendetta against me, but unless you are going to back up your statements with facts, I'd suggest you find someone else to trash.
    22 Oct 2013, 12:04 PM Reply Like
  • Water Brothers Financial Co...
    , contributor
    Comments (379) | Send Message
     
    What is your twelve month target - do you recommend nflx at these levels. I have no personal vendetta against you , but have trouble with experts in any field who refuse to take a stand. I see your byline constantly on the site and have read others comment as well that your views seem to self-contradict. So , as an expert, I am simply asking that you clarify right now what your target for nflx is and are you recommending it as a buy/sell/hold.
    22 Oct 2013, 12:22 PM Reply Like
  • Karlos DW
    , contributor
    Comments (28) | Send Message
     
    Others have a buy with a target of $180 so works both ways
    22 Oct 2013, 12:25 PM Reply Like
  • Mark Krieger
    , contributor
    Comments (4277) | Send Message
     
    Bill: when (S&P) they put in the sell rating earlier this am...NFLX shares stood near the $385 level...at that interval, the sell recommendation made sense.
    22 Oct 2013, 12:25 PM Reply Like
  • Bill Maurer
    , contributor
    Comments (5468) | Send Message
     
    I realize that, but now it looks foolish. If they were going to raise their price target, hold/neutral would have made much more sense.

     

    Also, a $365 target on a $385 stock isn't exactly a screaming sell. If they had a $250 estimate like some others, it would be justified.
    22 Oct 2013, 12:28 PM Reply Like
  • Bill Maurer
    , contributor
    Comments (5468) | Send Message
     
    I don't have a published target on NFLX currently. I may put one in after we get all of the data (need to see the 10-Q).

     

    As for a recommendation, I have not published a long/short article on NFLX in several months. My last article was tagged as "Long Ideas", but I won't provide a recommendation now until I see the full quarterly numbers.

     

    I will obviously say though that I'd be more willing to recommend it at $338 than $389, so the $50 pullback makes things interesting. I also have to see if Icahn has sold yet.
    22 Oct 2013, 12:32 PM Reply Like
  • HZLIU
    , contributor
    Comments (212) | Send Message
     
    The whole market does not make any sense. If you quote any upgrade or downgrade, today more upgrade than downgrade. Momentum up and momentum down. Fed leads casino mentality. Just wait till music stops.
    22 Oct 2013, 12:57 PM Reply Like
  • Esekla
    , contributor
    Comments (3493) | Send Message
     
    The speculation was simply overdone, but the hangover is likely to be brief. I'll say this for them, nobody knows content like Netflix. I think Nielsen's days are numbered. If retransmission fees and bundled channels ever go away, as they should, that puts Netflix in position to sell its viewer data...
    22 Oct 2013, 11:11 AM Reply Like
  • HZLIU
    , contributor
    Comments (212) | Send Message
     
    Nielsen's days are numbered and the secret of Netflix is exposed. Now content owners can charge more for future deal if they know their content drive subscription. Netflix is the master of content. Netflix only need to read Nielsen rating, it will know what is hot.
    22 Oct 2013, 01:05 PM Reply Like
  • Stephen Tips
    , contributor
    Comments (391) | Send Message
     
    @Esekla: I do not always agree with you but GREAT call on Nielsen/$NFLX data stream; and they already control the medium without cold call surveys, diaries, set-people meters/home units, etc. I wonder if they even thought about that money tree.
    22 Oct 2013, 01:11 PM Reply Like
  • Michael Blair
    , contributor
    Comments (4935) | Send Message
     
    @Esekia - great comment. The viewer data alone is valuable. I think the stock may be ahead of itself but the brand is growing in strength and I had not thought of the viewer data as a source of income. Thanks for that.
    22 Oct 2013, 11:16 AM Reply Like
  • TFCAB
    , contributor
    Comments (2003) | Send Message
     
    thanks Reed ...you just whacked 1/2 the nasdaq :(
    22 Oct 2013, 11:43 AM Reply Like
  • Water Brothers Financial Co...
    , contributor
    Comments (379) | Send Message
     
    You mean he slipped and actually told the truth about something? Am I the only one who really fears the veracity of this company's financials? I really believe this company is a separated-at-birth brother of Enron. They, like Enron are really a broker; they like Enron have a habit of double counts - i.e. you have no idea what real new sub numbers are as they count dvd subs once and streaming subs once , so the count could be skewed by 40-50%. The amortization accounting changes every quarter.Hopefully at some point their cfo will leave or they will change accounting firms and then you can short with wild abandon. I predict, as the noose tightens, that will happen within a year.
    22 Oct 2013, 12:40 PM Reply Like
  • Bill Maurer
    , contributor
    Comments (5468) | Send Message
     
    Your point about subs is meaningless. If someone is paying $7.99 for streaming and $7.99 for DVD, that is 2 subscribers, even if it is only one person. They are still generating those revenues.

     

    And to say that the amortization changes every quarter is unfair to a point. This year was the major launch into original programming. They had an initial way of amortizing those costs, but it would seem likely that they would change. When you enter a new line of business, the accounting you use on day 1 for it will not be the same as it is in year 10.
    22 Oct 2013, 12:49 PM Reply Like
  • Water Brothers Financial Co...
    , contributor
    Comments (379) | Send Message
     
    And if dvd goes away are they still 2 people? It is hardly "meaningless", you have to know the incentives paid to get someone to add service for example. Added households would be a far more predictive, reflective number. And, as to the original programming, no one else in the industry labels them as future costs. My point is that their numbers are obtuse and possibly misleading. There is no real difference between how you amortize programming costs vis a vis accelerated depreciation of corroding dvd's lifespan in theory. I try to get at simple explanations and I believe they want the numbers to be fuzzy to obscure how much too much they are paying for content, i.e. they are outbidding everybody by a mile to say they are a content producer. I believe that strategy is very risky because you have to win almost everytime out. A movie company can put out fifty films and win big on 3 in a year and book profits. Nflx has to have every original series add subs or pay for itself. Reed has no history running a movie co. nor as a producer nor have they brought on board anyone with that creative experience. Are they a creative co. or a tech co.? It will be hard to be both and I believe they will go broke in the process. HBO has been a creative co. for 30 years; they have Timewarner as a backstop and outlet and deep pockets patron - their road is a lot easier, as is AMZN's for that matter.
    22 Oct 2013, 01:06 PM Reply Like
  • Cliff Hilton
    , contributor
    Comments (1969) | Send Message
     
    I'm not an investor in Netflix, but I am a newbie to their subscription. Like last month. I've never had time. Now, it's I Love Lucy and a boat load of Disney. (Lightly salted popcorn and diet Coke please)
    22 Oct 2013, 12:03 PM Reply Like
  • KISS_investor
    , contributor
    Comments (345) | Send Message
     
    There is no basis for the current valuation. Reed is smart to say it.
    I don't short stocks, but I do buy puts on occasion..
    I fared poorly on this stock using that strategy in 2013...hehe

     

    I have healthy respect for the product, for the long term plan and for their growth prospects..The equity price is still just totally silly..

     

    Remember that they have terrible free cash flow..terrible gross profit margins, and despite their brand strength, they have almost zero leverage in negotiating fees with programmers...

     

    This is nothing but a momo stock...and if you play that game you can scratch off some pretty good lottery winnings, but your gains will be based more on luck and factors that you do not control and can only partially understand...

     

    when you buy this stock you are gambling on a bunch of tightly connected money managers and analysts that will lockstep move this equity up and down in huge increments, and you just don't know what they will do no matter how smart you think you are.
    22 Oct 2013, 12:43 PM Reply Like
  • smart_investoor
    , contributor
    Comments (221) | Send Message
     
    well said. money managers conspiring to manipulate the stock is right on.
    22 Oct 2013, 12:46 PM Reply Like
  • Water Brothers Financial Co...
    , contributor
    Comments (379) | Send Message
     
    This is also the reason financial journalism is so dangerous - last night there were folk touting the report on this site. Anyone taking that advice would now be 50$ underwater if they bought near the open. It also is a harbinger of what happens if the bull-bubble market that has fostered recommendations of this type flounders , and I believe it will. You will then see SA writers stairstepping recommendations of stocks like nflx all the way down.It will be , at 330$ it's a buy, at 280 a buy, at 250 a screaming buy. These stocks are way better looked at the old fashioned way - PE's , PEG's. Nflx, if you believe the numbers is worth on spec 50-70 /share - doubling the industry standard pe of 16 on some order. Tsla is worth perhaps 35 on fundamentals. cmg is worth 250 if you buy 20% growth. lnkd in is maybe worth 25 a share on spec. If Icahn is not a seller today he certainly will be tomorrow.
    22 Oct 2013, 12:52 PM Reply Like
  • Bill Maurer
    , contributor
    Comments (5468) | Send Message
     
    Yes, and the report was EXCELLENT. There were no articles on this site telling you to buy Netflix last night. There have been 3 NFLX articles since the report. 2 (including mine) were plain and simple earnings analysis, and one said short. Nobody said to buy.
    22 Oct 2013, 12:57 PM Reply Like
  • Water Brothers Financial Co...
    , contributor
    Comments (379) | Send Message
     
    Calling the report excellent encourages buying. Diminishing fcf is excellent in a growth co.? Slowing margins ? Then if your report is just simple earnings analysis I guess you and I can finally agree - based on today's market move - that your analysis was poor.
    22 Oct 2013, 01:15 PM Reply Like
  • Bill Maurer
    , contributor
    Comments (5468) | Send Message
     
    Calling the report excellent, which it was compared to expectations, is not a recommendation to buy. It's discussing a report.

     

    Free cash flow was up tremendously over the prior year period.

     

    Margins are improving, and dramatically. They dipped for the quarter internationally due to the expansion into a new country. Streaming and DVD margins were up.
    22 Oct 2013, 01:24 PM Reply Like
  • Stephen Tips
    , contributor
    Comments (391) | Send Message
     
    "financial journalism is so dangerous" And you proceed to spew dangerous financial journalism?
    22 Oct 2013, 01:30 PM Reply Like
  • Water Brothers Financial Co...
    , contributor
    Comments (379) | Send Message
     
    Fcf was not up quarter to quarter. All of your responses seem to indicate you are a strong supporter of the co. You are parsing the report to fit that belief. A runaway growth co. beating revenue by a fraction and eps by a few cents does not come close to justifying a triple digit pe. It was not "excellent" therefore, compared to expectations; rather it was adequate, if one likes the story.
    22 Oct 2013, 01:39 PM Reply Like
  • Water Brothers Financial Co...
    , contributor
    Comments (379) | Send Message
     
    Like saying stocks at unlimited PE ratios are risky? I think my comments are based on history, reality, fundamentals, being careful - trying to help SA readers step back and look at the big picture and accurate historical viewpoints. What have I said that was dangerous, as you see it?
    22 Oct 2013, 01:42 PM Reply Like
  • Bill Maurer
    , contributor
    Comments (5468) | Send Message
     
    I said year to year. Yes, it was down Q/Q, but OCF was up. The fact that they bought more DVDs in Q3 and had a higher amount of fixed asset purchases is meaningless.

     

    Last year, they had a Q2 to Q3 drop. It's important to look at the year over year changes, not the Q/Q numbers necessarily because of timing of purchases.

     

    I'm not a supporter of the company. I'm just pointing out the facts that people are spewing out that are wrong.

     

    And yes, the beat was impressive, given the amortization. They would have beat by a dime to $0.15 if analysts knew about the amortization. Q4 guidance was tremendously positive.
    22 Oct 2013, 01:45 PM Reply Like
  • Water Brothers Financial Co...
    , contributor
    Comments (379) | Send Message
     
    You are presuming what analysts would do if they knew that the co. was going to change it's accounting practices, which by the way are non-gaap for the most part and you call that a "fact". I think you skew facts to fit your thesis (as we all do) - like saying y/y but avoiding q/q. You also believe all of the explanations Reed gives for why and how and what they are doing. I think Nike's most recent beat was "impressive" and they actually make sizeable profit and have gaap earnings we can maybe believe in. Even Facebook's beat was more impressive than this and I would not recommend that stock at any price, just as I would not recommend this. I am convinced this is way more Blockbuster, AOL, Enron than an "impressive" co. longterm.
    22 Oct 2013, 02:02 PM Reply Like
  • Bill Maurer
    , contributor
    Comments (5468) | Send Message
     
    I'm not avoiding Q/Q. I'm just saying that they spent more in this quarter. A retailer that purchases a ton of stuff in Q3 might show bad Q3 numbers compared to Q2, but that's because all quarters are different.

     

    Cash from operating activities was up Q/Q. FCF was up tremendously from the year ago period.
    22 Oct 2013, 02:13 PM Reply Like
  • sreimer77
    , contributor
    Comments (241) | Send Message
     
    This bull is about to ride off a cliff. A:) No bears are left, B:) momentum stocks like Netflix and PCLN have left the atmosphere and taking off towards Mars. Priceline is worth 55Billion. Give me a break, does anyone even use priceline? I know people who use Kayak, but I stopped using Expedia years ago and have since go directly to carrier web-sites as it is cheaper. Why pay a fee to book travel? When their is "blood in the streets" is the best time to buy and when everyone says to buy, is the best time to sell. Every analyst in the world is upgrading stocks to buy that are already priced at levels never seen before. Market rally's on poor jobs data and record breaking low labor force participation rate. Why? Because the FED will keep printing? Who is going to buy it? The Chinese are down and the latest data is proving that. What American is willing to loan the US government $ for 5 years at a 1% interest rate? I would not loan the government $ at a 5% interest rate, they'll just blow it like they did with the 320 million for Obamacare. It was supposed to cost 80 Bil, is now 400% above budget and it will cost another 300 Mil to fix. Imagine if it cost seeking alpha, Facebook, Linkedin, Twitter the same amount to start a web-site? There would not exist!
    22 Oct 2013, 04:20 PM Reply Like
  • Bill Maurer
    , contributor
    Comments (5468) | Send Message
     
    Does anyone use Priceline? Well, nearly $7 billion in expected revenues this year, so there must be at least a dozen or so users...
    22 Oct 2013, 04:29 PM Reply Like
  • Sakelaris
    , contributor
    Comments (1625) | Send Message
     
    Today a lot of the talk has been about Netflix declining in price significantly.

     

    I believe, however, that several companies may be kicking themselves that they did not buy Netflix a year ago when it was so much cheaper. If the stock starts to go down significantly again, I believe that such a company could step in to buy Netflix.

     

    Indeed, this situation creates a kind of "floor" under the Netflix price. A buyout could occur well before Netflix could ever get below $100 again.
    22 Oct 2013, 11:31 PM Reply Like
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