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shamapant (< 20)

Help me invest in Netflix



September 29, 2011 – Comments (5) | RELATED TICKERS: NFLX

So I am thinking Netflix is cheap. Its funny, how like a month ago it was hard to find much wrong but now its hard to find much right. Amid all the pressure and problems, could someone help me address the real problems that Netflix has encountered, the impact these problems have, and the likelihood that Netflix will overcome these issues? Is netflix expected to lose subscribers? I am thinking about investing in NFLX leaps call options, but i am thinking i should wait like 2 weeks...thoughts? 

5 Comments – Post Your Own

#1) On September 30, 2011 at 2:58 AM, The1MAGE (< 20) wrote:

Not sure if it has hit bottom yet, but I am still trying to figure out why it is dropping so bad, and why some investors keep bashing this stock so bad.  There were a few faux pas recently, and I think completely splitting their services is not the best move, at least not initially.

But other then that, I think they are making all the right moves.  People keep seeing challengers all over the place, and other then Amazon, I don't see any of them being a serious threat to Netflix any time soon.

People see the Blockbuster takeover by Dish as a big deal, hurting Netflix, but I am not sure this will benefit anyone but their subscribers.   And netflix already has about 10 million more subscribers then Dish does right now.

People see the loss of Starz, but ignore the $300 million in savings that can be used for other content.  Which they are procuring left and right, actualy stealing a Dreamworks deal out from under HBO.

Then they are just starting their move from an American company to a world wide company.  1 million subscribers already, and I believe they are currently expandnig in to 40 countries. 

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#2) On October 01, 2011 at 1:34 AM, valuemoney (< 20) wrote:

Personally I would just stay away from NFLX and buy BRK.B shares with your money or WFC. NFLX is a gamble.

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#3) On October 01, 2011 at 3:58 PM, shamapant (< 20) wrote:

You're right that NFLX is a gamble, and BRK.B is a great investment, but greater risk=greater return, so my portfolio is a bit mixed between value and high growht.

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#4) On October 02, 2011 at 6:07 AM, walt373 (99.87) wrote:

Netflix's recent debacle with the price hike and splitting of DVD and streaming businesses has gotten all the attention lately, and most investors are attributing the stock's decline with these developments. I think these problems are superficial, though, and only symptoms of much worse problems that lie under the surface.

Netflix's main problem in a nutshell is that its streaming business is uneconomical in its current state. $8/month/user for unlimited access is simply not enough money to buy content.

The deal that Netflix hoped to sign with Starz was going to be for $300mil/year. This compares to their original deal of $30mil/year. That's a $270mil/year increase for essentially the same content. Compare this figure with their net income in the past 12 months of $214mil and the problem is pretty obvious.

The Netflix business model is dead - "get content cheaply and pass the savings onto customers." The cheap content is going away. Starz made a huge blunder by signing their original deal but they aren't making the same mistake again. Not only was the content massively underpriced, but the price was locked in for many years.

This made it seem like Netflix could have scale economics. With the $30MM deal, they were able to leverage it by rapidly growing their user base, spreading a fixed cost over so many more subscriptions. So why was the Starz deal repriced to $300MM instead of $30MM? Largely because of the increase in user count. The supposed operating leverage and margin expansion was temporary. Content providers are now looking for either shorter-term contracts or contracts with more fees based on growth.

Making the situation worse, Netflix uses very aggressive accounting. A large percentage of their costs is recorded as amortization of their content library, which is pretty questionable since they are basically expensing last year's costs. This inflates earnings as long as their top line is growing rapidly. But once they stop growing, they will no longer be able to outrun the amortization, leading to a drop in earnings.

Things are also looking bad on the balance sheet and cash flow front. I talk more about that in my blog post here.

Finally, valuation was always an issue with the stock, even if you assumed everything would go according to plan and growth would continue at a high rate. And even now, after it's fallen so much, it's still trading at a little under 30 times earnings. Personally, I believe it will fall to under $50 a share unless someone like Google or Amazon buys their streaming business. I'm short the stock.

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#5) On October 05, 2011 at 7:36 PM, shamapant (< 20) wrote:

If I could rec a comment, I would rec that. Exactly what I wanted to know, thanks

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