Netflix: Hard to Own
Board: Value Hounds
This is a hard to own stock as a few others have said including Jim Cramer.
From $300 down to $52 over the past 15 mos with a brief stop at $85 this summer when Reed Hastings had a FB moment over one billion viewing hours in June. It was then back to the mid-low $50's until two upgrades in the last week by JPM and Citi then down to $65 on a downgrade by BoA. Ridiculous don't you think? There is a certain level of cluelessness about Netflix and any recent baseless sentiment is enough to make the price jump as erratically as a kangaroo on meth.
I bought some at $57 because I like the volatility on options so I sold some calls. Who knows where it will be by the third Friday in December. Hope to keep it around in 2013 for options and entertainment.
Which brings me to an interesting observation made by Herb Greenberg. He believes that membership and ownership has upper limits of penetration in a population. This can't apply to everything--more than 10% of the population has cars and toilet paper at home. But for discretionary non-essential products, maybe there is a limit. HBO has peaked at 30 million subscribers and DirecTv is around 20 million US subscribers losing subscribers in August for the first time.
Netflix to Trigger the ‘Chanos Rule’?
By: Herb Greenberg
Any company showing fast growth ultimately hits a level of “all in,” or what I like to call the Chanos Rule — named after short-seller Jim Chanos.
This is when a product hits the point when everybody who really wants to have one has one — and the rest of the growth is either fill-in, replacement or gifts.
As Chanos has told me numerous times over the years, the magic number before growth starts slowing or stopping is when a growth company sells (or in the case of subscription-driven business, enrolls) between 25 million to 30 million units (or subscribers).
Examples include Spectrum Brands' George Foreman Grill], LeapFrog’s LeapPad, Cabbage Patch Dolls and, more recently, Green Mountain’s Keurig brewer.
Domestic growth for NFLX looks like it may have peaked. ComScores September traffic data showed 28.7 million unique viewers up only 2.6% over 2011. The third quarter data was worse showing a 2.6% drop in traffic. Blame it on the Olympics--I know Reed will.
It's an interesting theory and as plausible as the weak upgrades and downgrades Citi, JPM and BoA manage to put out. Without bending his business model to include pricing power and the stubborn insistence that $7.99 is the price for everything worldwide, NFLX's only hope is massive subscriber growth and that looks tenuous.