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# ValueThis4

ValueThis4
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• ##### Netflix: Asking Key Questions For 2014 [View article]
Sorry to be so forward, but your use of the price to sales ratio is flat out wrong. As a commenter in another thread has mentioned: the P/S ratio is the same thing as the Profit Margin (E/S) multiplied by the P/E ratio. Not sure where you're getting this mystical "25-40%" growth for netflix...looks to be around 22% (which, as you know, is very hard to maintain).

How about we take a look at 2010, 2011 when they were making good money and use that as a best case scenario for their profit margin. I say best case because everyone knows DVDs (which used to be a higher proportion of the business) are higher margin than streaming (if you don't know why you really shouldn't be writing about NFLX). Looks like their profit margin in 2010 was ~7%. What kind of P/E would you give a company growing at 22%? For a PEG ratio of 1 it would be 22, but let's use 25 just for fun. Nevermind that if NFLX actually tried to make 7% margins by raising prices its growth would slow and thus wouldn't be deserving of a high P/E. Nevermind that as NFLX raises prices the price of content will continue to rise along with them.

But let's ignore all that. Let's pretend that NFLX can raise prices, get back to its glory day margins, and still grow 25% for years to come. What kind of P/S would this yield?

.07 x 25 = 1.75. Multiply this by \$4B in revenues (a number I'm using just to be even nicer) and you get a \$7B dollar company....less than half the price it's currently trading at. You can use P/S if you want, but don't try to escape the arithmetic that follows from it. Another issue is your focus on earnings when clearly the company isn't cash flow positive. If all those earnings need to be continually reinvested back into the business to maintain its competitive position (the definition of the situation NFLX finds itself in), it isn't free cash flow. EPS means nothing. In the end, NFLX really has nothing proprietary or "moat-like" except a house hold name. They don't own or create 95% of their content and they don't own cable/satellite infrastructure that they could earn a good margin on. Anyone who got in earlier this year is sitting on some very nice profits, but I suggest they take them before reality sets in.
Nov 18 07:48 PM | 3 Likes |Link to Comment
• ##### Apple Stays Rotten [View article]
Wow, you'd think you insulted someone's mother or something..
Good article David. I'm not sure I completely agree with the way your model works, but I understand the reasoning behind ROIC and your basic premise. Put more simply, Apple's margins are headed down to a more "normal" level as competition catches up and product differentiation becomes increasingly difficult. It's basic economics. I'm only 22 and even I realize this simple fact. It's happened time and time again with electronics (PC's, "dumb" phones, Printers etc...) and yet people invested in AAPL keep wanting to think this time is different. Wonder how that mentality has worked out in the past?

The worst part is, even if this time is different, what return are AAPL "investors" really expecting to get at this price? 30-50%? 100%? You can get that return in a lot of other stocks. Hell, you could've gotten 100% with HPQ earlier this year. BUT NO WAIT AAPL IS GONNA BE A \$2 TRILLION DOLLAR COMPANY!!!111! Yea. Because that makes a lot of sense. The risk involved in AAPL right now isn't horrific, but there's nothing special about the company on the reward side. There was a time to buy AAPL. It was 5 years ago. You missed it. Now get over it.
Sep 23 11:51 AM | 2 Likes |Link to Comment
• ##### Icahn lowers Netflix stake to 4.5% [View news story]
You mean a company producing negative FCF isn't worth 25B? Who would've thought?
Oct 22 08:26 PM | 1 Like |Link to Comment
• ##### Philip Morris: Long-Term Debt For More Buybacks May Not Be Smart [View article]
Some quick Accounting 101: Book value is negative because they've bought back so much of their equity over the years.... Your statement of them having "more total liabilities than assets," while true I guess, is kind of meaningless. Look at AZO and DTV (the latter of which happens to be a stock owned by Berkshire). These are fantastic companies that have negative equity due to the simple fact that they continue to reward owners by increasing their share of earnings year in and year out.

On a less related note, I don't think comparing PM's interest rates to their dividend yield has much significance...you should be looking at their earnings yield (or FCF yield) as a whole (since that's what they theoretically could return to shareholders). Right now PM's at about 5.7% (1/17.44), so share repurchases aren't exceedingly accretive, but they're certainly not a terrible decision. Plus if their stock tanks they can always just ramp up the buyback.

I don't think PM is a fantastic investment here, but it's pretty dang consistent, and if it drops to a more mediocre multiple (12-13x) you should feel pretty comfortable buying in with the knowledge that their buybacks will be very accretive in the long-run.
Sep 23 05:57 PM | 1 Like |Link to Comment
• ##### Report: Amazon plans to offer smartphone for free [View news story]
This would be the most classic move of all time. A free Amazon smartphone? I'm on the verge of tears I'm laughing so hard. A lower priced/basically free service intended to "grow market share" and drive higher profits? Oh, you mean like Kindle? Like Amazon Prime? As if both of those haven't already proved this strategy doesn't work. Anyone holding this stock is the DEFINITION of a lunatic and I can only hope this story is as funny going forward as it has been in the past.
Sep 7 12:57 PM | 1 Like |Link to Comment
• ##### Apple's Buyback Program: Value Destroying And Value Retaining [View article]
Interesting take, but I think everyone here (and anyone passionately involved with Apple) keeps missing something, which is: Every Apple bull (including Icahn) acts like assuming no earnings growth is some extremely conservative assumption. With companies like KO, CHD, MCD that have extremely predictable operations and have consistently grown earnings for decades past, it usually is and can be seen as a good way to derive a conservative value. With Apple, however, this is not the case. In the consumer technology industry, earnings can (and have) taken a huge nosedive within a relatively short period of time (think BBRY, NOK). People might rant about how Apple has some unbeatable ecosystem or hidden advantage that locks people into their products and keeps margins high (people said the same thing about BBRY, NOK), but the cracks are already beginning to show and a "no growth" scenario may turn out to be relatively optimistic. Case in point: In June 2012 AAPL made \$35B in revenue. This June '13 quarter they brought in.....just over \$35B in revenue. Meanwhile, earnings went from \$8.8B to \$6.9B. See what's happening? Profit margins fell from 25.2% to 19.5% (-5.7%). The writings on the wall and everyone keeps looking away.

Let's say they somehow manage to repurchase every share you talk about in this article (174M) THIS year. Shares outstanding go from 908M to 734M. Now, let's assume Annual Revenue goes from about \$170B (from the last 4 quarters) to \$195B (a 15% increase which to me is generous considering revenues basically stagnated from June '12 to June '13). If profit margins drop only 3% from their current ttm 22%, you're looking at earnings of \$37.15B on 734M shares for an EPS of 50.6. Throw in a 12.5x multiple (where it's trading at now) and you get 632/share. From it's current price that's an awe-inspiring gain of...wait for it.... 26%. If margins fall further than 3% and revenue stays flat, all of which is relatively likely, you're looking at a stock that will probably be assigned an even lower multiple on lower earnings.

To sum it all up, you're essentially betting that an enormous \$450B company, in an extremely competitive industry (consumer electronics), with stagnating sales and falling margins will be able to somehow reignite sales growth AND keep convincing people to pay for a product that's looking more and more like the competition's every day. All for a paltry 30% gain. I might be more understanding if it was 75% or 100%, but you can earn a quick 30% on literally THOUSANDS of other stocks out there, and probably with less risk. Are people really still expecting a double out of Apple? Does a \$900B phone company sound realistic? Exxon provides a good everyone will need AND pay for for years and years to come....its market cap is <\$400B. You can get a relatively good idea of what demand for oil will look like in 10 years. No one has any idea what Apple's numbers will be or even what the industry landscape will look like. That's really all there is to it.
Aug 22 05:33 PM | 1 Like |Link to Comment
• ##### Pandora (P) is upped to Buy with \$24 price target at Morgan Stanley, the team calling the company "The Netflix of Radio," and "the best pureplay exposure to the secular shift of radio dollars to online channels." Pandora trails only Facebook and Google in monthly consumer usage, notes Morgan. Shares +4.9% premarket. [View news story]
Didn't know being called the NFLX of radio was a compliment. But Morgan Stanley said it so it must be true! Why anyone would want to buy these internet companies that have no track record of making money is beyond me. Makes for quite the spectacle though.
Jul 1 01:06 PM | 1 Like |Link to Comment
• ##### How Much Does DirecTV Really Earn? [View article]
Good article, I liked your churn method as a way of figuring out an approximation of maintenance vs. growth cap-ex. I've actually been looking at DTV recently and like a lot of what I see. I'm a little new at this, but I think I'm waiting for a better price (with the opinion that a price of ~ \$67 doesn't seem to present a lot of downside.

One quibble with the inclusion of marketing expenses in your analysis:
On page 71 of the 2012 Annual report under Advertising Costs they mention that "We expense advertising costs primarily in 'Subscriber acquisition costs' in the Consolidated Statements of Operations as incurred"
so you might want to check that you're not double counting. If I'm wrong feel free to ignore! Here's a quick link to their 2012 report:

http://bit.ly/1btB89a
Dec 10 12:07 AM | Likes |Link to Comment
• ##### Netflix: Asking Key Questions For 2014 [View article]
I know I shouldn't waste my time, but I just can't help it sometimes.

1) To use your logic, TWTR is growing 5 times faster than NFLX, so why shouldn't it have a valuation 5x as large?

2) Who says Facebook's valuation (which you're basing NFLX's off of in your comment) makes sense in the first place?

3) If you bothered to look at a cash flow statement you'd realize NFLX has been losing money every quarter this year (with the exception of this last quarter when they generated an astonishing <\$50m in FCF)

4) You really should keep track of articles you've posted in the past...
http://bit.ly/1fWyJFE

LOL
Nov 20 06:38 PM | Likes |Link to Comment
• ##### Netflix: Asking Key Questions For 2014 [View article]
Edit to my above comment: Meant to use \$5B in sales as an optimistic number (nflx should do around \$4B in sales this year). Even so that's still an \$8.75B company (1.75 P/S x 5)...

As for apple I'm not sure if you added net cash to your number (excluding repatriation taxes I'm getting more like \$422/share), but regardless by my reasoning you shouldn't be using P/S at all since you clearly don't understand it. Use a normalized earnings figure instead and a REASONABLE p/e ratio...and no you don't get to just assign a 30-40 p/e to every company growing quickly - they have to prove that is a sustainable growth rate for both earnings and revenue (especially earnings since last time I checked that's the number in the denominator of the p/e ratio).

By your weird P/S reasoning a company with \$80B in sales and no profits could be valued the same as MSFT or Apple...By the same logic any new tech company growing quickly should be given a P/S along the same lines of FB, TWTR, P etc... Margins matter. Sustainability of growth in earnings matters. You have neglected both in your analysis.
Nov 19 11:07 AM | Likes |Link to Comment
• ##### Hewlett-Packard's Free Cash Flow Generation And Low Valuation Make It A Buy [View article]
Just a quick question with regards to the debt within HP's Financial Services - anyone is welcome to answer. Shouldn't that debt be netted out with HP's receivables? I guess my logic is that the debt was really only taken on to be able to lend it to their customers who, in turn, buy HP's products. Thus it's debt, but (like IBM) not really debt and actually provides them some profit via whatever spread they can derive from lending it out at higher rates than they borrow at. Then again I could be wrong and am really just trying to start a dialogue on the subject...
Sep 3 05:15 PM | Likes |Link to Comment
• ##### More on the Netflix (NFLX) - Dreamworks Animation deal: The partnership between the two media players calls for 300 hours of original programming and appears to be a deeper commitment by Netlflix toward children's programming. Though Netflix let a deal for content from Viacom's Nickolodean expire early this year, it now has Dreamworks and Disney (starting in 2016) supplying it with content for kids. Financial terms weren't disclosed. NFLX +1.4% premarket [View news story]
Unfounded surges like these make me even more confident in my small short position. Spending even more on content that won't add anything to the bottom line until 2016 when they need money NOW? Genius! Further, if the financial terms weren't disclosed, how can anyone be certain this is a net positive for the company? If no one can be sure this deal is in fact a net positive for a company already struggling to earn money, why would anyone add to their long position or cover their short one? If it weren't so funny it might almost be sad
Jun 17 12:08 PM | Likes |Link to Comment