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Why Netflix Investors Shouldn't Fear Marco Polo Or Future Original Content
- NFLX investors remain fearful of its rising content obligations, including the money it has spent on new series Marco Polo.
- With plans for 20 new series a year, NFLX content costs are sure to keep rising.
- However, the company's emphasis on technology will result in a positive return in exchange for high content costs.
- NFLX has fallen 30% in the last three months on fears of slowing sub growth and higher content expenses.
- Yet, based on GoPro's media assets and YouTube's valuation, NFLX shares have fallen to a desirable range.
- The fears associated with NFLX are overstated.
Netflix Headed To 18 Million International Subscribers, International Profits Remain Nonexistent
- Approximately 91% of total international subscribers were paid ones which suggests that the total count could reach 18.7 million by the end of this year.
- We estimate the international streaming business constitutes roughly 20% to Netflix's value.
- Subscriber growth in international markets will remain strong in coming quarters, but the segment still lags far behind the U.S. in terms of profit contribution.
- At the end of the year, tax-loss harvesting is a major issue affecting investment securities that are down in a majority of the year's trading days.
- To measure the risk of such securities, a new algorithm called the current underwater position, or CUP, is presented.
- Using the CUP, investors can rank the risk of securities as both stand-alone and intra-industry risks. Netflix is used as a strong short-er bear case.
Netflix Notches Another First By Acquiring 'Unbreakable Kimmy Schmidt' From NBC
- Netflix has added ‘Unbreakable Kimmy Schmidt’ to its roster from NBC which had the series as a midseason replacement for 2015.
- ‘Schmidt’ comes from ’30 Rock’s’ Tina Fey and Robert Carlock, which gives the show a pedigree many are surprised NBC passed up.
- Comedies in general are hard to launch for the major networks and Netflix’s acquisition here will have a ripple effect throughout the entire industry.
- But I'm still buying a small batch to dollar cost average down.
- The fundamentals look very expensive but this is an earnings growth story.
- The company continues to expand globally and will soon realize returns on their investments.
Future Netflix Pricing Moves Hold Key To Investor Decisions
- Netflix erroneously blamed pricing for its lower-than-expected subscriber growth, leading to a 25% drop in share price.
- Consumer research suggests Netflix could have successfully upped its monthly price to at least $8.99 and even $9.99 for both existing and new subscribers, significantly impacting profitability.
- More aggressive pricing could double near-term profitability.
- Netflix analysts and investors should encourage company management to give added focus to the pricing function and consider broader and steeper price increases.
- On a sales multiple basis, Netflix is reasonably priced when compared to other large-scale online media names.
- International subscriber growth, along with domestic price increases, will drive the bulk of the revenue growth going forward.
- Domestic subscriber growth will likely slow to a 10% CAGR, but pricing increases will drive sales growth.
- When combining international revenue at $15 billion and domestic at $10 billion, I estimate Netflix may grow revenue to $25 billion by 2019.
Netflix Off-Balance Sheet Obligations: Concerns Are Way Overblown
- Netflix's off-balance sheet obligations are actually future costs of revenue.
- There's a legitimate reason why they're off the balance sheet to begin with.
- Netflix has plenty of financial flexibility even if it overbids on content in certain years.
- NFLX is not suitable for Defensive Investors or Enterprising Investors following the ModernGraham approach.
- According to the ModernGraham valuation model, the company is significantly overvalued at the present time.
- The market is implying 74.66% earnings growth over the next 7-10 years, which is extremely high compared to the rate the company has seen in recent years.
- Netflix’s programming costs could be growing faster than its revenues.
- Netflix has already agreed to pay $2 million an episode for the NBC series The Blacklist.
- Companies with deeper pockets and leverage could create a bidding war for programming that Netflix can't win.
- Just because a stock falls in price doesn't mean its shares are cheaper.
- The relationship between net income and cash flow is paramount in assessing earnings quality.
- Let's tie these two concepts together with respect to Netflix and address its valuation.
- As Netflix continues to rapidly burn through cash, it will be forced to raise more by selling stock or borrowing. Either of these events is bad for shareholders.
- The company will eventually dig itself into a debt-hole that it cannot climb out of; bankruptcy is a definite possibility within a few years if this continues.
- Increasing competition, exponentially rising content costs, and non-existent customer loyalty and stickiness will limit Netflix’s growth potential.
- The safest and most profitable way to bet against Netflix is via out-of-the-money puts, which could increase in value by over 1,000% when the financial collapse occurs.
- NFLX has fundamental concerns.
- Those will likely impact the stock in the quarters that follow.
- But the stock also is bouncing off of longer term support.
Sep. 22, 2013, 2:26 PM
- As cord-cutting slowly but steadily gains momentum, pay-TV providers are trying to strike more expansive on-demand (VOD) streaming deals to counter Netflix's (NFLX) rise.
- Whereas VOD services have typically offered 4 or 5 shows on a rolling basis, providers now want to offer every episode all season.
- The WSJ reports Comcast (CMCSA) has reached a broader on-demand deal with Fox (FOX, FOXA) that will include mobile viewing. Fox and (Comcast-owned) NBCUniversal are said to be more open to such deals than Disney and CBS.
- VOD services provide access to shows before Netflix does, but also include ads, often disable fast-forwarding, and usually don't cover back seasons.
- Netflix is telling media companies it won't pay as much for content licensed in bigger VOD deals. Content chief Ted Sarandos: "The less exploited shows are through on-demand services, the more valuable they are to us."
- Rentrak estimates free VOD viewing rose over 40% in 2012. Pay-TV infrastructure vendors such as Arris (ARRS), SeaChange (SEAC - previous), and Harmonic (HLIT) benefit from rising demand.
- Previous: Netflix changing Hollywood's investment habits, wants more exclusive deals
Sep. 20, 2013, 11:47 AM
- The Globe and Mail reports a survey March-April survey from research firm MTM indicated 25% of English-speaking Canadians had signed up for Netflix (NFLX +2.9%), up from 13% a year earlier.
- Moreover, 84% of polled Netflix users said they streamed at least one movie/TV show from the service every week. 37% of polled households with kids under 12 had a subscription, as did 1/3 of those with teens.
- Netflix had 610K international net subscriber adds in Q2, leading its international base to grow to 7.75M subs. 550K-1.25M international net adds are expected in Q3.
- Shares are making new highs once again.
Sep. 18, 2013, 11:20 AM
- DirecTV (DTV -1.1%) and Dish Network (DISH +1.1%) are more at risk than cable operators (TWC, CHTR, CVC) from a new generation of consumers unwilling to pay premium prices for TV packages, according to analysts.
- Pay-TV providers aren't the only group keeping an eye on the so-called "cord nevers" as broadcasters (DIS, CMCSA, FOXA, CBS, SBGI, BLC, NXST) weigh how long the current TV content model can stay locked in place.
- The bundling approach to cable/satellite packages helps broadcasters reap lucrative content deals.
- The outlook: "The revolution will take a long time," notes one grounded industry insider, but Internet TV (SNE, NFLX, AMZN) players could try to accelerate the shake-up through innovation.
Sep. 17, 2013, 10:04 AM| 4 Comments
Sep. 12, 2013, 10:05 AM
- Zynga (ZNGA +2.5%) has been upgraded to Equal Weight by Evercore. The firm had been bearish on Zynga for some time.
- Netflix (NFLX -1.6%) has been cut to Equal Weight by Morgan Stanley. BTIG downgraded shares yesterday.
- Symantec (SYMC -0.5%) has also been cut to Equal Weight by MS.
- Cognex (CGNX -0.9%) has been cut to Neutral by Citi. Piper upgraded shares yesterday.
- Polycom (PLCM +1.1%) has been upgraded to Outperform by Raymond James a day after the company announced a $400M buyback.
- Constant Contact (CTCT +2.5%) has been upgraded to Buy by Janney.
- ASML (ASML +3.8%) has been started at Conviction Buy by Goldman. Peer ASM International (ASMI +2.5%) has been upgraded to Buy.
Sep. 11, 2013, 11:58 AM
- Previously trading near breakeven, Netflix (NFLX -2.8%) has sold off in mid-day trading thanks to the downgrade.
- BTIG's Richard Greenfield launched coverage on Netflix with a Buy and $250 PT on April 15, when shares were trading at $173. With shares now above $300, he isn't as keen about the streaming giant's valuation.
- In July, Greenfield co-hosted Netflix's post-earnings moderated live video talk. Will Netflix bring him back for a Q3 talk?
Sep. 11, 2013, 10:48 AM
- A new Netflix (NFLX -0.5%) deal that will see the streaming service integrated into Virgin Media's (VMED) set-top boxes could have broad implications across the media landscape, according to analysts.
- Pay TV operators are slowly warming up to the idea of letting Netflix inside of their programming guides, instead of closing them out as a competitor.
- Though the financial benefits might be slow to be realized, the shift of the perception of Netflix is a long-term positive.
Sep. 11, 2013, 7:18 AM
Sep. 10, 2013, 7:25 AM
- Virgin Media (VMED) announces it will make Netflix (NFLX) available to its customers through their set-top boxes.
- The development will mark the first time a major Pay-TV operator embeds Netflix within its programming menu.
- Details of any financial arrangement between the two company weren't released.
Sep. 9, 2013, 2:22 PM
- Fresh off abandoning a doomed Dell proxy fight, Carl Icahn states on CNBC (video) he still hasn't sold any Netflix (NFLX +1.2%) shares. Netflix, which made new highs on Friday, is up over 4x since Icahn disclosed a position in the streaming giant last fall.
- Icahn refused to comment on whether he'd like Apple to acquire Nuance (NUAN +1.3%) (Apple might not care much for his advice regardless), but did take the occasion to declare the voice recognition software/services firm (16.9% stake) has a lot of upside thanks to its healthcare exposure.
- Nuance shares have ticked higher thanks to Icahn's comments. The company's healthcare ops (55% of op. profit) have been performing better than its flashier mobile/consumer ops, which are contending with soft PC sales and a transition to subscription/cloud services revenue streams. There's some speculation Icahn will call for a breakup of Nuance along business lines.
- More on Icahn/Netflix
- More on Icahn/Nuance
Sep. 5, 2013, 12:24 PM
- MS estimates there are 79M broadband-using households in the U.S., and predicts there will be 89M by 2017. Meanwhile, the firm believes 45M-60M U.S. households have "devices capable of bringing Netflix (NFLX +1.3%) to TVs," and expects that number to "converge with broadband households" in time.
- Analyst Scott Devitt has slightly raised his domestic streaming sub forecasts out of a belief a greater number of broadband-connected households will sign up in the next 3-4 years.
- Netflix has again made new 52-week highs, and is up 220% YTD.
Sep. 3, 2013, 6:15 PM
- On Oct. 14, Netflix (NFLX) will begin streaming a 70-minute comedy special featuring content from a Sydney, Australia show given by Russell Peters during his "Notorious" world tour, as well as a 4-part documentary about the tour called Russell Peters vs. the World. (PR)
- Reed Hastings mentioned in Netflix's Q2 shareholder letter the streaming giant plans to add documentaries and stand-up comedy shows to its arsenal of original content.
- Other recent content deals: Weinstein Co., Scholastic
Aug. 26, 2013, 2:32 PM
- Short Hills Capital's Stephen Weiss: "You take a look at Tesla. You take a look at Netflix. You take a look at Green Mountain Coffee. If you've got momentum, you're going to go a lot higher." Words of wisdom, or a reason for bulls to be cautious?
- Facebook (FB +2.3%) is adding to the gains it saw on Friday following positive numbers from comScore and ITG Research.
- Netflix (NFLX +3%) has been lifted lately by strong ratings for Breaking Bad (first-run U.K./Ireland rights), and a major deal with The Weinstein Co.
- There are also rumors Microsoft might try to buy Netflix to make (ex-board member) Reed Hastings Steve Ballmer's replacement, but the notion Microsoft will acquire a $16.9B company (a buyout premium could make it $20B+) just to get a new CEO should probably be taken with a spoonful of salt.
Aug. 21, 2013, 10:12 AM
- Netflix (NFLX -1.3%) is replacing its traditional Instant Queue with My List, a scrolling list of user-selected titles that appears near the top of Netflix's cover image-heavy home page.
- Whereas the contents of an Instant Queue are manually sorted by users, videos added to My List are sorted by an algorithm that guesses what content a user is mostly likely to watch.
- The feature is being rolled out to both U.S. and international users. The latter group hasn't had Instant Queues to work with, and instead has been completely dependent on the personalized recommendations delivered on Netflix's home page.
- Netflix recently added support for multiple user profiles per account.
Aug. 21, 2013, 9:32 AM
- AIG remains the "king of the hedge fund castle" writes ValueWalk, as Goldman's latest Hedge Fund Monitor shows 69 funds have the stock in their top 10 holdings as of June 30, ahead of #2 Google (GOOG) at 65 and #3 Apple (AAPL) at 50. The percent of equity cap owned by hedge funds is 14% for AIG, as opposed to negligible amounts for both Google and Apple.
- Based on percent of equity cap owned by hedge funds, Charter Communications (CHTR) is the #1 hedge fund hotel at 37%. Among S&P 500 stocks, J.C. Penney at 36%, Constellation Brands (STZ) at 30% and H&R Block (HRB) at 26% lead the way. The average for the entire S&P 500 is 5%.
- Goldman's basket of 20 "Most concentrated" hedge fund stocks has outperformed the S&P 500 by nearly 1200 bps YTD. Since 2001, the strategy has outperformed the S&P 69% of the time and by an average of 263 bps per quarter. In addition to the earlier-mentioned names there's: AN, VRSN, FDO, THC, CBG, GT, NFLX, TRIP, LYB, WPX, MSI, BEAM, DLTR, ZTS, WYN, LM, ETFC.
Aug. 20, 2013, 11:20 AM
- ITG estimates Netlfix (NFLX +2.7%) Q3 domestic revenue is tracking towards $917M-$922M, favorable to a $918M consensus. Domestic streaming revenue is said to be tracking towards $699M, in-line with consensus; this suggests upside is provided by Netflix's declining DVD business.
- Shares are rallying towards their 52-week high of $270.31, thanks largely to the Weinstein deal announcement. In addition to trumpeting the deal's importance, Weinstein says it's "discussing ways to reinvent the pay TV experience so that [Netflix's] audience can get even more for their money."
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