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Player Avatar TMF1000 (99.77) Submitted: 9/19/2011 10:59:46 AM : Outperform Start Price: $161.96 NFLX Score: +56.63

I was able to add Netflix at $161.96. I took it off and replaced it because I believe today's news started a new era for the company and wanted to measure the value.

The big news: Netflix will enter video games.

But that news was just jeered by Morgan Keegan analyst Justin Patterson writes:

Gamefly (leading games by mail service) spends over $30 million annually acquiring content. Why take this risk on now?

Gamefly charges what $15.95 for their customers to rent games. I don’t think it’s a coincidence that the new Qwikster is charging $15.99 for DVDs. And now this will include games. Spending $30 million a year buying game content is much better than paying $300 million for StarZ movies. And Netflix has the infrastructure in place to do a better job than Gamefly. This should make investors once again perceive them as a growth company and throw fear into those shorting the company.

At $161.50, Netflix’ PE is 40.99 – yes it’s expensive, but now it will be perceived as a growth company again. The synergies created by combining the DVD and hardcopy game business are in my opinion a big deal. This was another big Netflix move and a great one in my opinion and I suspect one that was planned for a very long time. I am sure anyone with a $15.99 DVD plan can mix and combine movies and games. This creates a value package that should bring in more money and give them more money to spend on what? Content – even more money to spend on streaming content. This is a good move for Netflix. And they will be perceived as a super growth company again which should make them trade again for high premiums.

Netflix notes

Price $161.96– PE ratio 41
September 15, 2011 – Netflix stocks fell $39.46 to close at $169.25.
September 16, 2011 Friday – Netflix continued to fall closing the day at $155.19 – intraday low $154.14: Intraday low PE ratio was 39.12.

September 19 2011, the stock price started to rise again based on what I feel was very good news.

----
But before the good news I want to discuss some of the events that led to the mini-netflix crash.

Cablevision has signed a deal with Turner Broadcasting to allow its programming to be available on Cablevision’s TV everywhere platform. The deal will allow cablevision subscribers to have next day access at no additional charge to programming from TNT, TBS, Cartoon Network and TrueTv and they can watch them on multiple devices.

This isn’t a big contract between two different companies. Cablevision is owned by Time Warner. And Turner Broadcasting is a subsidiary of Time Warner. The strategy will allow cablevision to compete better with Netflix video-streaming services. But it doesn’t represent an aggregation of content which is what would be needed to hurt Netflix.

Netflix’ DVD service is what makes them such a huge scary competitor to the Time Warner and StarZ’s of the world. Netflix aggregates content: It makes content from all studios readily available at one site. Don’t count out DVDs – they are not going away soon.

http://finance.yahoo.com/news/Cablevision-Turner-Sign-wscheats-4096791004.html?x=0&.v=1

StarZ deal:

September 1, 2011 it was reported that a deal between Netflix and StarZ could not be reached. Netflix offered $300 million to resume the deal which expires February 2012.

I really get the impression people believe this means a huge percentage of Netflix movie library goes out the window. This isn’t true. StarZ movies can still be seen on DVD. It does delay new movies content for DVD and eliminates it for their streaming content. I personally have never streamed a StarZ movie. I never did a lot of streaming. I much rather get the Dvds which in my opinion still offers sound value far beyond other services.

If you want new StarZ movies you can rent the package on Direct Tv for $12.95 a month. This is cheaper than Netflix, but you get only about 75 selections at any given time. In order to get video on demand you must pay for installation beyond your normal cable subscription. You will need a HDDVR about $7.00 a month ( a great service by the way) and then you may get more selections but it still very limited and only includes StarZ content.

So, perhaps you want HBO too and then you must pay more. My present Direct TV bill is about $134 a month including taxes. I get all the premium channels and that excludes DVR and it includes five receivers. The actual premium package is about $84 a month with only one receiver. With this sub you get all the premium channels. For another $10 a month you can get the HD-DVR (installation and receiver will run a few hundred dollars) and about $7 for each additional receiver. With the HD-DVR you can get the on-demand selections from all the premium channels. Even including them all, the selection is far less diverse than Netflix DVD selections. Netflix is the aggregator king – so far.

Many were disappointed by Netflix move to raise prices. Supposedly according to new sources (always suspect) many left refusing to pay the extra money. However, when you use the DVD part of the subscription, it is hard to beat Netflix for cost and variety of movies – I am Ok waiting for new releases. I have many times waited for movies to come to regular television before watching them, not cable, regular TV (four year wait or more) – I never felt deprived, but I am not a big movie guy. You couldn’t pay me to go into a theater any more. When I was young I loved it, but now I rather watch it at home and I don’t mind waiting. Netflix gives me all I need. The cable service is for my wife who really does loves watching television. And she is the one that uses Netflix – I watch those she gets that I am interested in with her but seldom order my own movies – though I have streamed old westerns and science fiction from Netflix and I do make sure she orders all the science fiction shows – the only new movies I really care about and I can still wait a long time for them. There hasn’t been a movie since Star Wars where I felt compelled to go to a theater. I did go to see Star Wars. I was 23 years old. I have seen movies in theaters with my wife, but today she likes watching at home too. Let’s face it – it is convenient and everything we want is here.

HBO has probably the largest video on demand on cable. You can get it on your computer free simply by subscribing to HBO through a service provider. Of course that will cost you some money about $12 a month, not including extra receivers or HD-DVR etc, but again you are only getting HBO movies and content – a fair selection, but to get Showtime, HBO, StarZ you have to pay up for each. If you get an entire package you get two movie channels free, but that package is $84 a month – Direct TV’s best deal. And all together, the selection including all of its exclusive content isn’t near what you can get by subscribing to Netflix DVD service.

Those selling the stock now are probably thinking that the DVD service has no value or growth. I don’t think that is even close to being true. Subscribers estimates are lower than the previous quarter, but if met is still higher than last year. Is it a trend? I don’t know. But I suspect there are plenty of new subscribers out there ready to subscribe to Netflix DVD service.

The greatest competition to Netflix is still the cable and satellite companies that acts as aggregators of content. Direct TV, for instance, has shows of HBO, Showtime, The Movie Channel, Disney, StarZ and many others and with HD-DVR many more videos on demand, but you have to pay dearly for the entire package each month. Netflix is by far the cheap alternative for entertainment – though you may have to wait a bit longer for new releases – I can wait: I am a patient investor and a patient consumer.

So how much does one have to pay to subscribe to Netflix under the new plan?

Events: July 12, 2011

Netflix reported price changes. They will separate their business into segments. Unlimited Streaming (no DVDs) will be $7.99. Unlimited DVDs 3 out at a time (no streaming for $15.99. If you want both unlimited DVD and streaming the cost will be $23.98. I have unlimited DVDs and Unlimited Streaming, but I seldom stream, so I could reduce the price I pay just by changing to the unlimited DVD plans. If I did this, I would save money over the old price, the only sacrifice would be the few movies I stream on the computer when I really don’t have anything better to do. I opted to keep the hybrid subscription. I rarely stream, but when I do, I am glad it is there.

From Bloomberg: Brett Pulley and Cliff Edwards

The “rare, large and surprising misstep” came after Netflix in July split its mail-order and streaming services into two plans, Barton Crockett, an analyst at Lazard Capital Markets, wrote in a research note today. The move effectively raised prices by 60 percent to $15.98 a month for people who want DVDs and online access.

Netflix probably lost 594,000 U.S. subscribers as a result of the price change, said Crockett, who has a “neutral” rating on the shares.

http://www.bloomberg.com/news/2011-09-15/netflix-tumbles-in-early-trading-after-cutting-u-s-subscriber-forecast.html?cmpid=yhoo

Barton Crockett called the new pricing strategy a “misstep”. How does he know? He goes on to say they probably lost 594,000 subscribers.
In the third quarter of 2011, Netflix estimated they had 25 million subscribers in the U.S. On September 15, 2011, the company revised its domestic subscriber estimates. They now believe they lost subscribers and now will report about 24 million domestic subscribers for the fourth quarter. Even so and this is important, their financial guidance hasn’t changed. They still expect to make $0.72 to $1.07. That is a big range. Perhaps many of the lost subscribers were the free subscribers.

Last year during the fourth quarter, they had only 20.01 million, so even with the revised estimates; domestic subscribers will be higher at 24 million. Last year in the fourth quarter, th

Report this Post 8 Replies
Member Avatar jantoniop (< 20) Submitted: 10/12/2011 12:13:56 PM
Recs: 1

I think there is
more gloomy days for Netflix, and i would be vey coutius on investing.
Joe

Member Avatar makemoney5 (65.76) Submitted: 10/25/2011 4:25:40 PM
Recs: 2

Sorry for your loss

Member Avatar BigFatBEAR (29.55) Submitted: 10/25/2011 4:55:18 PM
Recs: 2

...lousy growth companies.

That's gotta hoit!

Member Avatar trojan69 (< 20) Submitted: 10/27/2011 12:46:11 AM
Recs: 2

More important than picking good investments is managing your money to CUT YOUR LOSSES AND LET YOUR PROFITS RUN. Gerald Loeb The Battle or Investment Survival. His ideas are pertinent in every market even though first penned many years ago. Interestingly enough the world famous gambler Nick the Greek used the same methods in his Life as a Gambler. As a result of Loeb's book I am a happy retired investor. Motley Fool is foolish to not recommend cutting losses when things go against the investor. In Loeb's world the investor would have sold his position when his losses exceeded his limit. ie if the investor was willing to risk 10% of his investment the first time the stock declined by 10% he would have sold. In netflix case he would lose 10% of the stock's high not the 40%? it is down from its high now. Still no sell recommendation from MF. As Mr. Loeb said, "you can always buy the stock back but protecting your gain is more important than losing while hoping." I read his book frequently and am much happier for it.

Member Avatar TMF1000 (99.77) Submitted: 10/28/2011 11:23:05 AM
Recs: 5

Hi Trojan69,

Cutting your losses is a legitimate way to invest. But its not my way of choice. I purchased Netflix at much lower prices. I lightened some at $156, only to watch it go to $304.79. I regretted that a bit, but realize it is part of how I invest. I lightened based on news that studios were going to favor Blockbuster over Netflix and create their own alliances while others will go with Netflix to sell content. Since I lightened my position, I bought some more at $131 and change and recently at $74 and change. I believe in their long-term future.

The problems I believe with cutting losses habitually is that you sell out of a stock that might really be a great one. I tend to view drops as opportunities to invest at better value points. It doesn't always work out well, but if I have made a fair assessment of the business, it tends to work out far more than not working out. By buying at better value points, my cost basis goes lower and even a steep drop won't hurt much. Plus I believe in diversifying sensibly.

I tend to invest over time at better and better value points, so I allow time to test my thesis. This keeps me from investing too much in mistakes. As I ease into my stocks at better value points, time exposes mistakes before I invest too much. It isn't easy to buy at better value points over time. If earnings or cash flow goes down faster than the price the value doesn't get better, so it acts as a safeguard.

But if you found cutting losses quickly works for you, I would not change it. We all have to invest the way that keeps us in our comfort zone.

tom e

Member Avatar TMF1000 (99.77) Submitted: 10/28/2011 11:27:05 AM
Recs: 3

Other than the unexpected proposed splitting of the Company, nothing has really changed. They face the very same competitive threats, though the names have changed some, the threat is similar to what we were discussing back in 2007.

The valuation is better. The price crashed from its 52 week high of $304.79, but its earnings have gone up significantly too giving them a much better valuation. The PE at $84.26 is 19.15 which is in my opinion cheap. The cash flow yield is 6.5% which is good too.

This may not be a company for you. It isn’t a company that has an easily defined competitive environment. This isn’t a restaurant stock where growth can be easily guessed by extrapolating store counts and noting growth each quarter. We can’t even categorize Netflix competitors easily. Some compete directly with Netflix, but could also be viewed as a supplemental entertainment source, so the line becomes a bit hazier. Some of their competitors also include Netflix as a customer of their content.

I am investing in them because I believe they will eventually get 30 to 40 million subscribers. That event may now come a bit later than first thought, but when it happens, they will be a powerhouse in the industry which will give them greater bargaining power with studios and more money to buy far more streaming content.

There is a risk that Amazon or Apple, with deeper pockets may come in and make it harder to get those subscribers. But this risk isn’t a new one. They have always gone up against larger competitors with deeper pockets, it isn’t a new threat.

Netflix has never been a risk free investment, but that hasn't kept it from being a good one. It isn't likely to be smooth sailing until they get subscriber growth over 30 million, then I think they will become a much greater force in the industry.

I am not a one-value point investor. I allocate money according to risk. I don't mind buying when others are selling and panicking. I don't overweight my portfolio in any one stock or any few stocks. I build for the future. I have no way of knowing for sure, but I continue to invest in Netflix because I believe they will someday have 30 to 40 million subscribers, perhaps more. But 30 to 40 million would give them massive leverage in the industry and that is worth holding and buying, particularly when the value is reasonable. Earnings will fall during the q1:2012 quarter as they invest in content for the UK and Ireland. I can live with that. I can wait two years or even four years for them to cross that 30 to 40 million. I also can live with the fact that if Netflix is beaten by future competitors, they may not be a good future investment. And no one can predict who will be on top in five years, no one has that perfect edge yet.

It may be proven that there is room for other competitors. Apple and Amazon may not like investing in this business simply because they can. Amazon's last earnings report was disappointing and spending on content for their streaming business was one of the causes. Apple may have better options to invest their money. Building a streaming business may not be as enticing for Apple as investors fear. Movies isn't music. The latter is pretty simple to start and not expensive to maintain.

I don't think anyone knows what the future will look like. It may be entirely different in five years. Netflix and the industry may switch to a fee per view as the studios wants giving them many sources of income. That would be really bad for us the customers which would force us to pay far more for shows. Pay-per-view is expensive, desireable for studios, bad for us.

So I am investing in Netflix because I think they will evolve into a greater force in the industry.

October 24, 2011 3Q:2011 earnings’ highlights:
** Revenues were $821.839 million up 48.6% from $553.219 million
** TTM revenues were $2.93 billion or $54.44
** Earnings were $1.16 up from $0.70
** TTM earnings were $4.40
** Diluted share count 53.87 million
** Cash $365.8 million: debt $200 million
** Cash flow for the quarter including content $14.626 million up from $4.985 million
** Cash flow including only capex $35.45 million up from $35.89 million
** Content library $1.28 billion
** Cash flow for nine months including content $151.2 million up from $69.285 million
** Cash flow for nine months excluding content $213.22 million up from $160.3 million
** TTM Cash flow excluding content costs $295.62 million or $5.49 per share
** Subscriber 23.9 million
** Average monthly revenue per customer $11.56
** Churn 6.3%
** Acquisition costs were $15.25 down from $20.03 last year
** Trading range between October 24, 2011 and the present $74.25 to 82.72: PE ratio range was 16.88 to 18.8: PS ratio range was 1.36 to 1.5: Cash flow yield range was 6.6% to 7.39%

Q3: 2011 Notes:

Sales were $821.839 million up 48.6% from $553.219 million last year. TTM revenues were $2.93 billion or $54.44 per share up from TTM revenues of $2 billion or $37.27 per share. TTM revenues per share were up 46.1%. I am sorry the price of the stock went down from a high of $304.79, but their business is very strong. It is growing very well. Price doesn’t always reflect the value of the business correctly. In fact it seldom does. That is fortunate for me, a multi-value-point investor.

What about Net income? Is it growing?

Yes!

Net income for the quarter was $62.46 million up 64.5% from $37.967 million. Earnings per share were $1.16 up from $0.70. TTM earnings were $4.40 up 67.3% from TTM earnings of $2.63. One poster said they beat guidance because they lowered guidance. Well that isn’t correct, they never lowered guidance. They made it very clear they were leaving guidance where it was, only subscriber numbers would be lower. They beat the high end of earnings guidance by $0.12. Not a characteristic of a loser.

What about cash flow? Is it growing?

Yes!

TTM Cash flow excluding content costs $295.62 million or $5.49 per share up from TTM cash flow of $110.47 million or $2.05 per share. Cash flow for nine months including content costs was $151.2 million up from $69.285 million last year, so even when we include content costs they are growing cash flow. Since content costs are taken out of earnings, I don’t feel it necessary to include it in my cash flow numbers. Also they can slow spending on content at any time. Presently they are making plenty of money to fund spending on content.

So why did the price drop? At $304.79, its 52 week high, the stock price was expensive. And I did say it was expensive in just about every one of my page posts. But this has never been new, it has always been expensive. I even compared it with BIDU. BIDU is by far my most overvalued stock, but it was overvalued years ago when I bought it and it’s even more overvalued today. If I hadn’t bought it because of the valuation, I would have missed a big opportunity. Netflix performed similarly until news finally scared investors out of the stock. I believe the exit was a temporary setback, not permanent. I also think subscriber growth will continue to grow. The price increase upset some subscribers, but they still are posting some very strong numbers.

Member Avatar rednack (< 20) Submitted: 11/3/2011 4:49:03 PM
Recs: 1

I also bought in today, i had the feeling it was on the BOTTOM. so i'm up 10%

Member Avatar diditbad100 (< 20) Submitted: 11/28/2011 8:08:04 PM
Recs: 0

BBI was trading at $63 when I first thought about buying..........
What does this have to do with NFLX......technology constantly changes and evolves.
Nothing proprietary about NFLX, might be bought out one day by Direct TV to compete with Dish!

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