Netflix Inc (NASDAQ:NFLX)

I love the company, but it's price is way out of line.

I scored a lot of points red thumbing the first NFLX bubble and plan score plenty more on NFLX bubble 2.0. Thanks to a knowledgeable person on S.A. I have a better understanding of the movie to the home market this time around and while this has me a little less pessimistic about NFLX chances I'm still convinced they're toast in the end. My red thumb is all about NFLX model and how it's current strength is also it's fatal flaw.

To understand my red thumb you need to understand the basics economics of movies to the home. Traditionally there are something like 4-5 premium movie channel services such as HBO & Showtime that buy rights to movies from about a half dozen major movie studios that they then sell through the MPVD's (Cable, Satellite etc) to end users; roughly splitting the fee for this service with the MPVD'S. In this model the premium service that pays the most gets the best content and can charge higher service fees to end users. The services that spend the least, get the lesser content and can't charge as much and none of this makes a difference to the MPVD's because they can sell all of these services and get their 50%.

NFLX has disrupted this model by basically cutting out the middle man MPVD's and selling directly to the consumer end user at roughly half the price of the traditional services. Once they got to a sub count on par with the traditional premium services the economics work because they are essentially trading off the extra fee for what they don't pay the MPVD's. That's roughly where they are right now however you need a little more background on the economics of the industry to understand the story. The entire amount of money the premium services pay to the movie studios for movies to the home is ~$7B/ year. NFLX currently spends about $2B/ year on content which is roughly the same as HBO the top traditional Premium Service. The movie studios sell rights for home viewing to the highest bidder at a fixed cost anywhere from a year to a few years at a time. From this perspective NFLX is already about on par with the best traditional service in terms of spend on movie content and due to the somewhat fixed fee's with the studios they should be able to outspend the traditional services as they continue to add subs.

So this is fantastic for a NFLX long no? NFLX is already able to spend on par with the top traditional premium service and they area aleady accounting for something like 30% of total home movie content spend while charging roughly half of what the traditional services charge subs. If they keep adding subs they should be able to lock up most of the content and strangle the traditional services and create something of a monopoly no? Well you need to go back to the beginning of my lesson on the home movie service industry to see why the answer is actually no. You see when NFLX strangles out the premium movie services like HBO and Showtime they are also hitting the pocketbooks of the MPVD's who you will recall keep roughly half the fee the traditional services charge. While NFLX is already a financial equal to the best of the traditional premium movie services they are a pimple on the butt's of the MPVD's financially. For a frame of reference Comcast alone did ~$20B in video revenue in 2012 spending ~$8.4B on content. Compare this to NFLX $3.6B total revenues including DVD and $2.6B total cost of revenues.

So it should be clear from the numbers above that when the MPVD's premium service revenues take a hit from the little pipsqueak upstart undercutting them they have the ability to crush this little pip squeak and I wouldn't want to betting that they won't. I haven't followed NFLX closely in the last year or so but when I did, Hasting stated that the MPVD's were NFLX primary competition not the oft cited Amazon or Hulu type services. He even tried to suggest at one point that somehow NFLX could sell their service to the MPVD's and were already in talks to do so. This is laughable when you consider the price point and the fact that NFLX is not likely to give up selling the same content themselves. In fact Comcast CEO came out shortly after Hastings made the suggestion and stated they had no discussions with NFLX and didn't see how the economics could ever work. While not many in the analyst community seem to see the threat from the MPVD's I have no doubt that Hastings does.

One last point before I wrap this pitch up. About a year before NFLX finally imploded Hastings was openly bragging about a virtuous circle of sub growth generating more revenues that allow for more content leading to more sub growth. A handful of bears like me were calling b.s. and predicting content cost that were abnormally low at the time due to a boneheaded deal Starz made with the company a few year earlier would skyrocket as that deal expired and newer deals at market prices would balloon their content costs. Hastings was touting this virtuous circle in addition to touting the company buying back stock at nose bleed prices in a blatant attempt to prop the stock up to feed his massive ego IMHO. After about a year of this he had to raise prices 60% (cut service in reality) because they would go BK at the then current pricing and service model. After this tanked the stock they had to do a secondary to raise cash that wound up coming in at a price roughly 1/3 of the price they just paid to buy stock back a few months earlier. IMO Hastings manipulated his costs to prop the stock up as long as he could. He did this by delaying the timing of content availability ( to delay recognizing the cost) in order to manufacture a few extra quarters of impressive results before these costs swamped their earnings. I suspect the recent come back is due somewhat to gaming content cost recognition to generate a few good quarters before cost re-set again. Even if this is not the case once NFLX success starts eating into the MPVD's revenues I fully expect them to respond by going after movie content directly via services like X-Finity or maybe buying up more of the traditional services ala TWC owning HBO and using their massive financial advantage to crush the pipsqueak upstart.

Wish I had put real money into netflix at the time I picked to outperform in 2006

competition will beat em

Bright (but not certain) future. My money is on NFLX (lliterally) to come out on top of the streaming video race.

rightnow, along with alot of othe investors i am taking a bath with my holdings of gold and silver eagles. but when i look for advice i get the same confusing answer while the market is going up GS will go down or stay the same. if someone could explain why my stocks are going up while my gold is down in a world of uncertainy. and with that how do the fools feel about GS..george god bless americ and our troops..

From all the other competitors that I have tried for streaming content Netlix has performed the best and offers the most content. Also, I think the million dollar competition that had to develop their recommendation engine was well worth it. IMO, it helps to streamline the process of finding movies that "I" will enjoy.

Great company, worth about $50-$100 now at $209

Netflix has crossed the tipping point as a company. It's now in HBO territory, and will grow like wild-fire.

Basically - a cheap unlimited monthly streaming and DVD model, that includes popular original programming - is unbeatable.

Great promisse on future

Too far, too fast, and none of their main problems have really been resolved. How much will their content cost?

Great growth and fundamentals.

Back from the dead. High risk ventures in Europe have paid off and US subscriptions on the rise. Investments into media productions also seem to be retaining subscribers well, however is not a large draw for new subscribers yet.

1) Worldwide Streaming Subscriber Growth
2) Facebook integration.
3) New viewable content on smartphones etc...

Netflix will change how cable television network bundles there cable package and the internet will start to replace cable as we see currently.

bump

Negative free cashflow and a model that depends on big media giving them content. Secretive about some debt. Might be a home run long haul, but there are big reasons to be nervous. Hard to imagine how this is the best place to put money with such gigantic question marks. Bizarre stock. Both bulls and bears seem nuts to me. Bottom line is - no one has a clue how this will shake out. We only know that who ever guesses right - GUESSES - will crow about their predictive genius later.

NFLX got a huge bump from earnings yesterday; I expect the bump to subside some.

Global growth. Obvious short-term and long-term gainer.