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  • Netflix: 6 Bucks For A Penny  [View article]
    Thanks for your thoughts Bill. I would like to add a few comments of my own regarding the future of Netflix.

    I don't know where the stock will trade over the next few weeks, but I am reasonably confident it will trade higher then the current price over the next couple of years. Here are a few reasons why I believe Netflix will be a much bigger company then it is now.

    First, there are 52 million homes with a DVR in the house. Those households are paying between $10 and $17 a month for a device that is used less and less frequently as so much television content is available for streaming. So the US streaming audience is bigger then current estimates suggest.

    Second, the competition is not all it's cracked up to be. A year ago everyone was consumed by all the entrants into OTT video. Yet a year later the only true competition to come forward is Amazon. Yes, Hulu is a decent service but it is ad supported and recent management departures leave its future in flux.

    Amazon is competing with Netflix but not head to head. At the end of the day, Amazon's main goal is to get you to buy more content. By allowing you to watch some video programming for free with your Prime account, Amazon is certain you will be willing to pay to watch other video content. That is why they don't segregate their content. When you search a show or movie it shows up as a prime offering, a rental option, or an opportunity to buy. It is much like the lending library for your Kindle. In the end Amazon wants you to buy. So they will not go head to head with Netflix for big content deals.

    Third, potential profitability on streaming is very high. Showtime's profits can be isolated in CBS's 10K. As of last year, Showtime had a 38% operating margin. Showtime is only netting $6.85 of the $15 charged by the cable operators, so clearly Netflix can earn much more money on incremental subscriber growth.

    Fourth, new content offers pricing leverage. Yes Netflix is upgrading their content offerings with the Disney deal and the launch of original programming this year. Does anyone seriously think the company will never raise subscription prices as the content improves? Early reviews suggest House of Cards is comparable in quality to HBO and Showtime productions. HBO costs $15 a month; Netflix costs $8. Each $1 increase is $3.50 per share.

    As for the valuation of the stock, please don't include the start up losses from the international business in your EPS calculation. All media businesses lose money as they build out their audience. There is the negative cost of acquiring content upfront which is then offset by future subscription fees and/or advertising dollars.

    I believe a better way to look at Netflix is to estimate what the US business can earn in the next year or so and then put a value on the international subscribers. Netflix generated an 18.5% contribution margin in the 4th quarter (significantly less then Showtime) and management believes margins can grow approximately 100 basis points per quarter. If they can maintain the pace of subscriber growth in the US another year, the earnings will be over $5.50 per share assuming a continued decline in the DVD business.

    I believe the international subs should be valued at $100 per sup. That is very conservative since they are generating $84 dollars a year in revenue. Just to put it in perspective, the stock market is valuing a Time Warner cable subscriber at $3300. I realize the monthly fee at Time Warner is much higher, but a Time Warner sub is not worth $40 more particularly as more and more are either discontinuing their service or cutting back to a more basic package.

    All in all, Netflix's current subscriber base can justify a stock broadly in the $150 to $200 range over the next year. However, if you model the company out several years with a higher sub base and much better margins you get a significantly higher stock price.

    So the bears can continue to highlight competition, cost of content, and lack of near term profits. For those that believe, we'll let the story play out a little longer.
    Jan 29, 2013. 10:31 AM | 3 Likes Like |Link to Comment
  • Something for Netflix (NFLX -1.7%) bulls to hang their hats on: The NPD Group reports that more than half of all consumers between the ages of 18 and 24 with an Internet-connected TV use it to watch Netflix. The trend could bode well for the company with the pace of growth of Internet-enabled devices still strong and with the young demographic seemingly enamored with the service set to age into the sweet spot of advertising.  [View news story]
    52 million homes have a DVR which includes a monthly subscription price greater then Netflix. US streaming market much greater then Wall Street is estimating.
    Jan 22, 2013. 11:09 AM | Likes Like |Link to Comment
  • How Google Seeks Global Domination  [View article]
    thoughtful article Dana. I believe the only short coming to Google's strategy is Frommer's is the old paradigm. We've gone from trusting the reviews of the supposed expert to relying on the opinions of the masses (if our friends are in the mix so much the better). No longer do people rely on Consumer's Report, New York Times Book Review, Roger Ebert, Michelin, and all the other go to sources of the past for what we're suppose to buy, watch, read, or eat. Now we rely on Amazon, Yelp, Trip Advisor, Netflix, and other user generated reviews to help us with our consumption decisions. Frommer's has a very small audience and while being part of Google will no doubt drive more traffic to the site it can't compare with all the reviews and traffic that Trip Advisor garners. I am long Google and I am particularly excited by their advancements with You Tube but I believe their attempt to gobble together some antiquated travel and dining compendiums into a dynamic travel intermediary is a bridge too far.
    Thanks again for your thoughts.
    Aug 14, 2012. 01:19 PM | Likes Like |Link to Comment
  • Just Out Of Bankruptcy, CIT Group Is Being Pressured Again  [View article]
    Timely article David since the company hosted it's first analyst day in six years this morning. I'm still trying to figure out how you came to focus on CIT as a way to express a negative outlook on Europe. Nearly 80% of their portfolio is US based with only 6% of loan exposure to Europe. The largest exposure is to Great Britain at 2.7%. Total exposure to the PIIGS is $180 million out of $34 billion of assets, not exactly a problem. Bottom line, CIT is a US lender and it's fortunes will be primarily determined by the health of the US economy.

    I also hope you realize their loans to the airline industry are leases of aircraft which are secured by the equipment. In addition, much of the aircraft leasing portfolio is to government owned airlines.

    Lastly, you reference their cost of debt which is dated story at this point. The company has been lowering their funding costs since emerging from bankruptcy. In the first quarter, the net interest margin (adjusted for FSA) was 1.97% up from 1.41% last year. Management indicated this morning, they expect the margin to be 2.50 percent in the second quarter, over 100 basis points wider then the same period last year.

    Bottom line, the company is trading at 75% of tangible book value; has sold off low earnings assets; lowered the cost of funding by 120 basis points; and has $5 to $7.50 in earnings power.

    If I were you, I would hedge my short position
    Jun 14, 2012. 03:59 PM | 1 Like Like |Link to Comment
  • Netflix (NFLX) content starts to come out of a dry spell with the streaming addition of Thor and next month's planned additions of blockbusters Transformers: Dark of the Moon and Captain America: The First Avenger. February's expiration of deals with Starz and Disney hasn't helped subscriber growth, which takes a toll on the stock - down 4% today and down 42% in three months.   [View news story]
    anyone wishing to know what DVDs and streaming content have been added to the Netflix library can log onto hackingnetflix.com. each Monday for a list of new movies, television shows, animation, and documentaries.
    Jun 11, 2012. 09:38 PM | Likes Like |Link to Comment
  • Netflix (NFLX) is a "frenemy" of the cable industry, Cox CEO Patrick Esser maintains. While admitting Netflix is a content rival, Esser also notes 40% of Cox's broadband customers streamed Netflix content in March. Netflix content chief Ted Sarandros (previous) admits his company is cannibalizing some cable viewing, while adding Netflix's investments in original programming are due to its inability to license content from the likes of HBO and Showtime.   [View news story]
    Thanks. How do you track the data?
    May 25, 2012. 08:38 AM | Likes Like |Link to Comment
  • Netflix (NFLX) is a "frenemy" of the cable industry, Cox CEO Patrick Esser maintains. While admitting Netflix is a content rival, Esser also notes 40% of Cox's broadband customers streamed Netflix content in March. Netflix content chief Ted Sarandros (previous) admits his company is cannibalizing some cable viewing, while adding Netflix's investments in original programming are due to its inability to license content from the likes of HBO and Showtime.   [View news story]
    40% of Cox's broadband customers! Could Netflix be reaching saturation?
    May 24, 2012. 12:19 PM | Likes Like |Link to Comment
  • Netflix Executive Out, Massive Insider Buy: What's Going On?  [View article]
    Tilson has 5% of his fund invested in Netflix. He doesn't own 5% of the company
    May 11, 2012. 10:22 PM | Likes Like |Link to Comment
  • Netflix Executive Out, Massive Insider Buy: What's Going On?  [View article]
    I think you meant to say T 2 has a 5% position in Netflix. Tilson doesn't manage enough money to own 5% of NFLX
    May 11, 2012. 10:20 PM | Likes Like |Link to Comment
  • Netflix: Limited Downside, Significant Upside  [View article]
    If you are referring to the content liabilities they are about $2.1 billion as the end of March. The company has around $800 mm of cash on the balance sheet and as I said yesterday will generate about $2.4 billion of cash on its streaming customers over the next year. If you want you can subtract approximately $200 mm for churn but remember subscribers are still growing so over the next year the annual run rate of subscription revenues will be increasing. The company continues to add content at a rate commensurate with the increase in its subscriber base. Again Netflix continues to generate revenue from its streaming business while competitors are not. As long as their subscriber base grows the business will continue to generate free cash flow.
    May 11, 2012. 10:07 AM | Likes Like |Link to Comment
  • Netflix: Limited Downside, Significant Upside  [View article]
    Let's talk about competition. Name another service that has announced an offering that generates revenues from that service commensurate with the programming that needs to be licensed to compete with Netflix. Amazon: already subsidizing every Kindle Fire they sell and customers' shipping costs. Offering programming via Prime brings in no new revenue; it only enhances a Prime membership. By the way why is LoveFilm trailing Netflix in the UK even though they were the established player. You Tube: spending a $100 million on programming and $200 million on promotion. Will generate revenues from advertising. Doesn't sound like a competitive service. Apple: not licensing content but willing to rent or sell to the consumer. Good for some viewers but not an all you can eat model. Coinstar: looks like vapor ware. Still no announcement of a launch date, cost of the service, what programming will be offered and where it will be marketed. At 24 million subscribers, Netflix is generating $2.3 billion which can be reinvested into programming. That's $2.3 billion more then any competitor.
    By the way for everyone who believes Netflix is fading into oblilvion, go back and read the transcripts of all earnings reports from the media companies (Time Warner, Viacom, Disney, Scripps, Discovery, CBS, Comcast, etc.) Every call included a discussion on Netflix.
    The fact remains Netflix offers you the opportunity to watch what you want to watch when you want to watch it without commercial interruption. Unless of the competitive services are going to offer more programming or a lower price service consumers will keep choosing Netflix. The company has $4 billion market cap compared to the $20 to $35 billion market caps of the traditional media companies. Last I look they were all losing viewers and/or subscribers while Netflix continues to grow subscribers.
    May 10, 2012. 12:47 PM | 2 Likes Like |Link to Comment
  • Cablevision (CVC) will join Comcast (CMCSA - previous) in offering a Netflix-like (NFLX) streaming service for its cable/broadband customers, predicts BTIG's Richard Greenfield. As evidence, he points to remarks made during Cablevision's earnings call about new software investments. Greenfield thinks Cablevision is worried about the Verizon/Coinstar JV, which is expected to have a beta launch this summer.   [View news story]
    With leverage of nearly 5 to 1 where is Cablevision going to get the funds for pay for streaming content?
    May 4, 2012. 10:00 AM | Likes Like |Link to Comment
  • This Just In: Netflix Business Model Broken  [View article]
    Since you're back writing about Netflix, I'm back commenting on your posts. I was at the MS conference last week when Hastings made his comment. There was some other statements from that conference. Netflix content spend this year is equal to half of Amazon's operating profit so you have to wonder how much money Amazon will spend on acquiring new content considering they are already subsidizing Prime and the Kindle Fire.
    You Tube was willing to pay the same licensing fee as Netflix for the right to stream CBS content, but CBS chose Netflix. Why? Because You Tube is a threat to broadcast television with their goal of stealing advertising dollars from linear television. Comcast controls the content for NBC Universal and nothing else. If they want to stream that content exclusively on Xfinity that's their prerogative but it's not enough to deter consumers from the 20,000 hours of content Netflix offers. Time Warner Cable is separate from Time Warner so one company has the content the other has the pipe. Hasting's comment on distributing Netflix through the cable operators is a recognition that Verizon and Comcast are discussing potential nationwide streaming services. Those MSOs not wishing to launch streaming options may look to Netflix as a defensive alternative to other cable operators encroaching on their turf.
    Netflix's "power" is the same as any other network acquiring content. They pay for it. If they don't grow subscribers they will not have enough cash to acquire additional content. On the other hand if subscriber growth continues they will have a huge competitive advantage over any other company wishing to compete. The reason is any other entrant is either going to have to offer a significantly cheaper service or have a much deeper library to entice subscribers to switch from Netflix to a new service. That is why Hastings is spending aggressively; it raises the bar for any one wishing to compete. Why has Amazon only attracted 2% of the streaming audience to date?
    Mar 6, 2012. 12:00 PM | 7 Likes Like |Link to Comment
  • Is Netflix On A Suicide Mission?  [View article]
    Anyone see the Wall Street Journal article this morning on Lillyhammer? It already premiered on Norway. One in five homes watched the show and it is the highest rated drama in Norway this year. So much for Netflix not producing any of it's own content. Keep shorting!
    Jan 30, 2012. 10:08 AM | 1 Like Like |Link to Comment
  • Is Netflix On A Suicide Mission?  [View article]
    How are they driving the consumer away? I still get DVDs in the mail. I'm paying a higher price, but when I looked at competing services I couldn't replicate the convenience and choice at a comparable price. The DVD business will be what it will be.

    You're right on the cash. Their problem was a reset on the subscriber number after they had already made programming commitments. Now subscribers are growing again so they are in a better position to match spending with revenue projections. If subscribers turn south again, they are in trouble.
    Jan 27, 2012. 01:56 PM | 1 Like Like |Link to Comment