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Netflix Investors Should Anticipate International Growth To Accelerate
- Netflix lays out its content strategy at the UBS Global Media and Communications Conference.
- Netflix’s growth prospects are compelling, as the company has a competitive advantage when sourcing and creating content.
- International growth will likely exceed expectations, as survey data indicates significant interest.
- The company’s presence in North America, South America and Europe will expand, generating significant growth in the number of total subscribers.
- Netflix’s increasingly complex business faces real near-term threats.
- Q4-14, US Streaming subscriber numbers to be key focus.
- International growth strategy a double-edged sword.
- Earnings outlook for the next three fiscal quarters is sharply negative.
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.
Mon, Jun. 9, 11:20 AM
- Netflix (NFLX -0.7%) is out with its ISP Speed Index for May and takes a swipe at "some" large ISP providers (VZ, TWC, CHTR, CVC) along the way.
- ISP Speed Index (Mbps): Cablevision-Optimum 3.03, Cox 2.94, Charter 2.87, Suddenlink 2.83, Comcast 2.72, Time Warner Cable 2.45, Bright House 2.23, Windstream 1.90, Verizon FIOS 1.90.
- The company says some ISPs are harming consumers by double-dipping to get fees from subscribers and content providers for the same access.
- In an interesting twist, Netflix says it will continue testing using an error message when a broadband provider has persistent network congestion. A broad roll-out of the policy is being considered.
- Previous: Netflix vs. Verizon over error message
Fri, Jun. 6, 2:13 PM| 7 Comments
Thu, Jun. 5, 3:07 PM
- Verizon (VZ +0.4%) has sent a cease and desist letter to Netflix (NFLX +1%) over error messages the company is reported to be displaying placing blame at the feet of Verizon for a crowded network.
- The company says there is no basis to make the claim that it's solely responsible for the issue.
- A Verizon spokesperson calls the error message a "publicity stunt."
Thu, May. 29, 9:22 AM
- Netflix (NFLX) will air new seasons of DreamWorks Dragons under the terms of an exclusive deal the company has with DreamWorks Animation (DWA).
- The Netflix launch of the kids series based on How to Train Your Dragon is set for spring of 2015.
- DreamWorks Dragons previously ran on the Cartoon Network.
- What to watch: How to Train Your Dragon 2 debuts in theaters on June 13. A strong showing could help boost the franchise across mediums for both DreamWorks and Netflix.
Tue, May. 27, 8:25 AM
- Starz (STRZA) has dropped content from Sony Animation (SNE), according to analysis from Janney Capital.
- The initiative could lead to a savings of up to $35M a year as the company looks to grow through original programming and less expensive niche shows.
- At least one Sony Animation title, Cloudy with a Chance of Meatballs 2, is currently available on Netflix (NFLX) in what could be an important development for the streaming service.
- Netflix has built a broad array of content for the younger demographic as part of its long-term growth strategy. On top of titles from Pixar, Disney, and DreamWorks - a deal with Sony gives the company a formidable stream of content aimed for children.
Wed, May. 21, 10:12 AM
- Amazon (AMZN +1.3%) started streaming HBO (TWX) content that is over three years old today under the terms of the new licensing deal between the companies.
- Earlier this week, Netflix (NFLX +2%) CFO David Wells confirmed his firm didn't bid for the rights to HBO content as it reiterated its commitment to develop original series and license exclusive rights to content.
- Netflix's presentation at the JPMorgan Global Technology, Media, and Telecom Conference (webcast).
Wed, May. 21, 4:02 AM
- Netflix (NFLX) intends to enter France, Germany and four other European countries later this year, adding to online movie and TV subscription services that the company provides in the U.K., Scandinavia and the Netherlands.
- Netflix will be jumping into crowded markets, with Amazon's Lovefilm set to be a major rival in Germany, while France has tough regulation.
- The other European countries that Netflix intends to launch in are Austria, Switzerland, Belgium and Luxembourg.
- Netflix's investment in expanding overseas means its international unit is likely to continue making a loss.
- Netflix has 48M subscribers in over 40 countries, with over 12M of them outside the U.S. (PR)
Tue, May. 20, 8:25 AM
- Netflix Latin America (NFLX) says it purchased soccer drama Mata Mata from Red Arrow International.
- Mata Mata tracks three young Brazilian soccer superstars for three years.
- The company is looking to capitalize on the heightened interest in soccer in Latin American countries with the FIFA World Cup around the corner.
- Terms of the content acquisition weren't disclosed.
Thu, May. 15, 5:47 PM
- Carl Icahn sold 421K Netflix (NFLX) shares in Q1 (16% of his position), thereby lowering his stake to 3.7%.
- Icahn, who once owned nearly 10% of the streaming giant, disclosed last October he had cut his stake to 4.5% following a 457% return. His son, Brett, and fellow Icahn Enterprises fund manager David Schechter remained unwaveringly bullish.
Thu, May. 15, 12:13 PM
- By a 3-2 vote, the FCC has backed chairman Tom Wheeler's neutrality proposal. As previously reported, the proposal doesn't stop ISPs from creating pay-for-priority deals with content providers (fiercely opposed by neutrality supporters), but does seek comment on whether they should be banned.
- The proposal also calls for creating an ombudsman to represent the interests of Web users, and for holding ISPs to service minimums. Moreover, it suggests re-evaluating the looser neutrality rules mobile carriers have been subject to.
- Notably, Wheeler (no doubt sensitive to the public backlash to his past remarks) stated during the FCC's hearing (live blog) he's open to regulating ISPs as common carriers (something they've strongly opposed). The commission seeks comment on what rules it should use to enforce neutrality.
- Initial comments on the proposal can be submitted until July 15, and reply comments until September 10.
- Netflix (NFLX -2.5%), which has pushed for tougher neutrality rules even as it agrees to direct peering deals in the near-term to guarantee service quality, is following the market lower. The FCC vote comes as Sandvine reports Netflix has accounted for 34% of North American peak downstream traffic in 2014, up from 32% six months ago.
Thu, May. 15, 4:43 AM
- The Federal Communications Commission is due to vote today on a proposal to formally allow some "commercially reasonable" deals that would enable Internet content companies to pay fees so that their traffic receives priority on the network.
- Facebook (FB), Twitter (TWTR) and Google (GOOG, GOOGL) are among those opposed to "pay-for-priority," while Netflix (NFLX) is strongly in favor of net neutrality as well. The latter has reluctantly forged "direct-peering" agreements that remove bottlenecks between networks and ensure that its contents streams more smoothly.
- Advocates of net neutrality fear that pay-for-priority will lead to "fast lanes" for corporations that can afford it and slower traffic for others, and some even want Internet providers to be reclassified as utilities, as is the case with telephone operations.
- Meanwhile, the FCC is also scheduled to decide on rules for the sale of low-frequency airwaves to wireless carriers, with the regulations expected to limit how much Verizon (VZ) and AT&T (T) can purchase.
- Other relevant tickers: CMCSA, TWC, ALLT, LVLT, CCOI, FTR, WIN, CTL, CHTR, CVC, DISH.
Mon, May. 12, 10:34 AM
- Following a public backlash, FCC chairman Tom Wheeler is backtracking a bit on rule changes (floated last month) that would allow U.S. ISPs to charge content providers for access to a priority "fast lane."
- A new draft of Wheeler's plan seeks comment on whether such arrangements, referred to as "paid prioritization," should be banned. It also states the FCC will scrutinize deals with content providers to make sure non-payers aren't at a disadvantage, prevent ISPs from doing deals with varying terms, and (notably) seek comment on whether broadband should be regulated as a public utility.
- Netflix (NFLX +3.2%), whose bandwidth spend accounts for a sizable portion of its expenses, is higher amid a broader Internet stock rally. The streaming giant has struck direct peering deals with Comcast and Verizon this year, but has also made it clear it's not thrilled with having to make them.
- Cogent (CCOI +2.2%), which provides peering services for Netflix and many others, is also higher. Its shares tumbled after the Netflix-Comcast deal was announced.
Fri, May. 9, 9:05 AM
- Netflix (NFLX) is raising the price of its basic U.S. streaming service for new subs by $1/month to $8.99/month. However, an e-mail sent out to many existing customers tells them their prices won't change for two years.
- Netflix, only 3 years removed from the Qwikster debacle, stated last month it plans to hike prices for new U.S. and foreign subs by $1-$2/month (depending on the country) in order to finance more content spend. But it added existing subs will maintain their current pricing "for a generous time."
- With Netflix possibly on its way to having 70M+ global streaming subs in two years - it currently has 46.5M - a $1/month hike could yield over $800M/year in extra revenue by the time it reaches Netflix's entire base.
- NFLX -0.3% premarket.
Thu, May. 1, 12:26 PM
- Yelp's Q1 report, which was accompanied by a full-year guidance hike and followed by a slew of upgrades, is helping fuel a major rally in high-beta Internet stocks that were pummeled over much of March and April.
- LinkedIn (LNKD +5.5%), which reports after the close and entered trading down 40% from a high of $257.56, is among the notable gainers. As are Twitter (TWTR +3.5%), crushed yesterday in response to its Q1 numbers and guidance, and Pandora (P +6.5%), hit hard last Friday due to the light Q2 guidance provided with a Q1 beat.
- Facebook (FB +3.5%), less damaged by the selloff than some peers, is posting solid gains as the Street gives a thumbs-up to yesterday's mobile ad network launch. "Facebook is essentially bringing the high advertising ROI and targeting precision it has perfected on its own app to the rest of the mobile web," proclaims Goldman, albeit while cautioning near-term sales will be limited.
- Netlifx (NFLX +5.5%), off 30% from its high going into trading in spite of a positive response to last week's Q1 beat and price hike announcement, is bouncing strongly.
- Other gainers: ZU +5.9%. TRLA +5.6% (rallied yesterday following earnings). PCLN +2.8%. EXPE +3.7%. MEET +4.3%. LIVE +9.9%. ANGI +3%.
Wed, Apr. 30, 10:07 AM
- Hulu (DIS, CMCSA, FOXA) made some significant announcements today at the Upfront meetings in New York City.
- The company plans to allow more viewers to watch content on mobile devices for free this summer. A new iPhone app will also launch within months.
- CEO Mike Hopkins told advertising execs that Hulu is in talks with pay-TV providers to get inside of cable boxes. If the firm can pull off the trick and box out Netflix (NFLX) on some cable or satellite services it would be a bit of a coup.
- Another innovation from Hulu: An online/mobile Pizza Hut ad will be run soon which allows consumers to order a pizza from within the ad. The concept could lead to a pay-per-conversion form of advertising which would appeal to consumer product and service companies.
Tue, Apr. 29, 1:47 PM
- Grupo Televisa (TV +1.9%) is in negotiations with Netflix (NFLX +1.9%) to create original content for the streaming service, according to company execs.
- The two companies already work together under a content licensing deal.
- Previous on Netflix's Spanish content plans: Netflix to launch Nosotrso los Nobles, CEO Reed Hastings 'confident' on Latin America growth
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