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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.
Tue, Jan. 7, 7:05 AM| 4 Comments
Dec. 27, 2013, 1:54 PM
- With high-flying Twitter (downgraded by Macquarie) leading the way, several Internet momentum plays that have delivered big 2013 gains are seeing some year-end profit-taking.
- In addition to Twitter, notable decliners include Netflix (NFLX -2.8%), Pandora (P -3.6%), Trulia (TRLA -2.7%), Zillow (Z -2.4%), and Groupon (GRPN -1.9%).
- On the other hand, many Chinese Internet names are adding to this year's gains. In addition to Baidu (buying Perfect World's e-book unit) and Ctrip (received a bullish T.H. Capital note), gainers include Sina (SINA +4.9%), Dangdang (DANG +4.8%), YY (YY +4%), 58.com (WUBA +3%), and NetEase (NTES +3.4%). An overnight Shanghai rally is likely helping.
Dec. 10, 2013, 1:34 PM
- Though still generally below their mid-October highs, Internet momentum stocks are turning in what might be their best performance during a rally that has now lasted two weeks. While Twitter (previous) is the star of the show, Facebook (FB +3.5%), Yelp (YELP +1.8%), Groupon (GRPN +4.7%), Netflix (NFLX +2.1%), LinkedIn (LNKD +1.4%), and Pandora (P +3.4%) aren't getting left out.
- Several Chinese Internet names are also higher. In addition to Baidu, which is benefiting from a bullish Pac Crest note, Sina (SINA +6%), Ctrip (CTRP +6.1%), Qunar (QUNR +6.3%), and Youku (YOKU +3.9%) are staring at big gains.
- Morgan Stanley's Scott Devitt is out with another bullish note on Groupon. Devitt notes an MS survey of 358 SMBs found only 26% of merchants have run Groupon deals in the last 12 months, something he thinks suggests there's "a long run way of merchants" that can still be signed up.
- He also sees room for Groupon to improve its customer targeting - the company still isn't able to track which deals were shown to customers, or were clicked on, in prior e-mails - and expects its new site (allows deals to be browsed without an e-mail address being given) and a revamped e-mail layout to boost growth.
Oct. 22, 2013, 5:16 PM
- In a new 13D, Carl Icahn discloses he has lowered his stake in Netflix (NFLX) to 4.52%. Icahn had nearly a 10% stake in the company when he first disclosed his investment a year ago.
- Shares are up over 4x since Icahn first bought in. He admitted earlier this month Netflix's run-up meant shares are no longer a "no-brainer."
- NFLX -2.2% AH after falling 9.2% in regular trading.
- Earlier: Netflix turns negative post-earnings
- Update: Icahn pared his stake in part by unloading 2.4M Netflix shares earlier today at $341.44. Shares are currently at $317 AH.
- Update 2: Icahn on Twitter: "Sold block of NFLX today. Wish to thank Reed Hastings, Ted Sarandos, NFLX team, and last but not least Kevin Spacey."
Oct. 22, 2013, 11:04 AM
- 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.
- CC transcript
Oct. 22, 2013, 9:14 AM
Oct. 21, 2013, 4:12 PM
- Netflix (NFLX) reports it added 1.29M subscribers in the U.S. during Q3, compared to a 630K gain for Q2 and guidance for 700K-1.2M adds. Some analyst estimates pegged the quarterly net adds higher, but the upward momentum is more than enough to satisfy investors.
- Total U.S. subscribers at the end of the quarter was 31.09M vs. 30M expected and 28.7M for rival HBO.
- The company says it expects to double its investment in original content, although still keeping the spend below 10% of total content expenses.
- Q4 guidance is for net additions of 2.01M which is above the estimates of some analysts.(shareholder letter .pdf)
- NFLX +9.5% AH.
Oct. 21, 2013, 4:01 PM
Oct. 16, 2013, 9:56 AM
- Intel (INTC +0.3%) has been upgraded to Buy by B. Riley following its Q3 beat and light Q4 revenue guidance.
- Yahoo (YHOO +1.7%) has received a two-notch upgrade to Outperform from CLSA after it posted mixed Q3 results and soft Q4 guidance, but also strong Q2 numbers for Alibaba.
- Cisco (CSCO +0.4%) has been cut to Neutral, and Juniper (JNPR +3.6%) upgraded to Buy, by MKM. Juniper reports on Oct. 22.
- Netflix (NFLX -0.2%) has been cut to Hold by Hudson Square ahead of its Oct. 21 Q3 report.
- Vimpelcom (VIP +3.9%) has been upgraded to Overweight by Morgan Stanley.
- BT (BT +1.7%) has been upgraded to Conviction Buy by Goldman.
- CyrusOne (CONE +2.7%) has been upgraded to Buy by BofA/Merrill. However, the firm is maintaining its $23 PT.
- Ultimate Software (ULTI +1.6%) has been upgraded to Overweight by Evercore.
- Ellie Mae (ELLI -6.5%) has been cut to Market Perform by JMP.
- Super Micro (SMCI -2.7%) has been cut to Hold by Stifel.
Oct. 10, 2013, 3:25 PM
- Media stocks outperform the broad market with comments from Liberty Media's (LMCA +2.5%) John Malone on the monetization possibilities in the industry not hurting the festive mood one little bit.
- If Malone is to be believed, new forms of content distribution will lead to riches across the sector.
- Advancers: Time Warner Cable (TWC) +5.6%, Charter Communications (CHTR) +3.9%, CenturyLink (CTL) +3.3%, CBS (CBS) +3.9%, Netflix (NFLX) +5.5%.
- Liberty Media Analyst Day webcast
- Related ETFS: PBS
Oct. 8, 2013, 11:48 AM
- With the government shutdown having reached day 8, many U.S. and Chinese Internet stocks that have seen giant 2013 gains (often with the help of momentum traders and/or short squeezes) are falling sharply.
- U.S. decliners include Facebook (FB -5.2%), Yahoo (YHOO -5.2%), Netflix (NFLX -4.7%), LinkedIn (LNKD -7%), Zillow (Z -5.3%), Trulia (TRLA -7.5%), Yelp (YELP -9.3%), Groupon (GRPN -4.9%), and Web.com (WWWW -10.2%).
- Chinese decliners include Baidu (BIDU -6.2%), Sina (SINA -7.5%), YY (YY -7.3%), Sohu (SOHU -5.1%), Renren (RENN -9.2%), Youku (YOKU -9.6%), Vipshop (VIPS -6.9%), and Dangdang (DANG -10.7%).
- A chart of the YTD performance of some key names speaks for itself.
Oct. 1, 2013, 1:27 PM
- Carl Icahn says he hasn't sold any shares of Netflix (NFLX +3.9%) just yet, but that holding on to his sizable profits isn't such a "no brainer" anymore.
- It's a rather grounded look at Netflix with valuation seeming to be outrunning the company's ability to grow profits in an increasingly competitive streaming market.
Oct. 1, 2013, 8:40 AM
- Netflix (NFLX) lands a generous price target hike from MKM Partners on its view the streaming service's international subscriber totals will surprise.
- The investment firm's thesis on Netflix is more focused on global mass penetration than pricing in the U.S.
- NFLX +1.9% to $315, 17.5% short of MKM's new PT of $370.
Sep. 23, 2013, 8:16 AM| 3 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.
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.
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