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How Netflix is Failing You



November 18, 2010 – Comments (6) | RELATED TICKERS: NFLX

Some heretic thinks Netflix might not be all that and a bag of vegetable puffs.

How Netflix is Failing You.

I think there's a decent chance Netflix is going to get creamed in the future when it

1) has to announce lower prices

2) has to announce an earnings miss because of lower prices

3) does both.

I plan to play this possibility using cheap, out-of-the-money puts. Low-odds, big potential return type stuff.


6 Comments – Post Your Own

#1) On November 18, 2010 at 11:47 AM, Option1307 (30.58) wrote:

Thought provoking aricle, thanks for sharing! +1

I've had netflix for years and love the service, that being said I don't really use the streaming content component thus don't have the same issues as you.

However, this is definitely something to think about, but luckily (or unlucky?) I'm not an investor so I'm not too worried.

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#2) On November 18, 2010 at 1:18 PM, TDRH (96.87) wrote:

Hard to understand the valuation with redbox on every corner, and low technological  barriers to entry for streaming service.  That said, what a run.

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#3) On November 18, 2010 at 2:15 PM, TMFBent (99.24) wrote:

Yup, that's what I think too, TDRH. I'm sure my opinion will be as popular as a toot in the pews, given the NFLX stock fan base, but I didn't get where I am today (somewhere above the basement earwigs in the TMF pecking order) by saying what's popular.

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#4) On November 18, 2010 at 2:32 PM, Melaschasm (71.33) wrote:

Personally I am more concerned about a slowdown in growth than a price cut.  The current P/E ratio is sky high, and needs constant rapid growth to avoid a stock price collapse.

As a consumer I have not seen anything that compares to Netflix streaming for $9 per month.  The only close competitor is Hulu, and that has both a more limited selection, and commercials.


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#5) On November 18, 2010 at 8:53 PM, ikkyu2 (98.16) wrote:

Bit delivery!  DVDs back and forth through the mail were a pretty revolutionary bit delivery model in 1999.  The bandwidth was pretty high: 4.7 GB per pair of bulk-rate postage stamps.  A large DVD library, replicated at a bunch of local distribution centers, and a computerized back-end to reduce filing time; and contracts with the major studios to rent out their DVDs, and you've suddenly built yourself a moat.

NFLX is doing pretty well at streaming broadband, but the barriers to entry are far lower and they don't own any aspect of it, as opposed to AAPL that controls the iTMS, the AppleTV hardware, and the iPhone; Google that controls the Droid; TWC/Comcast that control the bandwidth to the home; Verizon that own the dumb pipes; etc. Where's NFLX's durable competitive advantage?

Gone, that's where.

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#6) On December 20, 2010 at 6:37 PM, metoo105 (27.86) wrote:

OT... Did you just clear me out? Damn you. It's of course the case the only folks that I am interested in aren't interested in me. I feel like Groucho Marx -- or is it Woody Allen?

OKAY - this is a great idea by the way. Out of the money shorts on NFLX. In fact this is exactly the kind of situation that I am myself looking for. I think that I have figured out an arbitrage here that is a big idea that hasn't yet been incorporated into the wisdom of the markets, even though it follows from first principles of basic mathematics.

Which gets me to the other thing that I was pestering you about: since you are really and truly one of the few fools worth listening to, I do really and truly wonder why you've got an outperform on AFAM when there was the warning letter sent to them, an SEC investigation into their competitors AMED, and generally a quite pissed off government following the WSJ article accusing the industry of soft fraud. It seems likely that there might be some trouble ahead. 

If you share with me your view on AMED, I'll share you my big, but shockingly simple options idea.

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