Good article on NFLX

[Eric50]

I just read the below on Netflix. It's a really good analysis of its business model and the dangers it faces. At 62 times earnings, it might be time to start a short/put option position....

 

Eric

 

http://seekingalpha.com/article/226299-netflix-this-stock-s-story-is-over

[watsa_is_a_randian_hero]

I'm bruised up on this one.  Short since 110.  Been adding to the short along the way.  Started just with puts, now shorting outright.

 

I look at it from a porters five forces perspective:

 

Bargaining power of suppliers: Extremely high.  Suppliers have typically earned the economic profits in this industry

Bargaining power of customers: Extremely high.  Very low switching costs.

Threat of New Entrants: Extremely high.

Threat of Substitute Products: Extremely High. (Redbox, apple, walmart, pay-per-view)

Rivalry: Low.  This is the only factor helping nflx right now.  With blockbuster in chapter 11, there has been more than enough business to go around for rival redbox.  And other rivals have to catch up.

 

In total, I see this eventually eating away all of the profits of nflx.

[T-bone1]

watsa_is_a_randian_hero,

 

I couldn't agree more with your analysis and the article (although I don't think the article gives enough weight to HBO's new online presence) . . . and I have also been short since that level and adding . . .

[watsa_is_a_randian_hero]

and its not even as if its a business in a highly competitive industry with a average P/E multiple that I'm saying should be lower...its trading at a much higher valuation than the market in general

[Guest Bronco]

Animal spirits - extremely high!

 

Hang in there.

 

 

 

[T-bone1]

today was unpleasant, but the facts (as I see them) are comforting:

 

the Jeffries analyst, raised his price target from $128 to $175 while simultaneously lowering his 2011 earnings estimate from $4.65 down to $3.80 on Monday. You can't make this stuff up!  His earnings estimate is still above consensus and he lowered it because . . . higher content and postage costs

 

whoever owns the content will squeeze them (huge fees for EPIX, upcoming renegotiation with STARZ), whoever owns the pipe will squeeze them (USPS, CMCSA, TWC . . . not to mention LVLT etc.), whoever own the user experience will squeeze them (everyone is only to happy to have netflix on their iTV, Xbox, googletv, wii, etc. right now . . . but apple, amazon, bestbuy, google and microsoft, comcast, time warner etc. want to be content providers, and they own the livingroom).

 

There is no way the projected margins or market share ever materialize, but the stock price would be no more silly at $200 than it was at $140 . . . hopefully it won't get there.

[kmukul]

the put options (leaps) are so expensive, is there anything available at decent prices?

[Guest longinvestor]

All right folks, you got the biggest reason to short the crap out of NFLX. Cramer is pumping the stock....he thinks that traditional valuation methods don't cut it when it comes to NFLX! He is inventing new ones to get NFLX to a market cap where sky's-the-limit!

 

Fast Money Recap

Cramer's 'Mad Money' Recap: Netflix Is Worth More (Update 2)

By Scott Rutt    09/22/10 - 06:55 PM EDT

 

NEW YORK (TheStreet) -- "The averages don't reflect the most significant milestone of the year," Jim Cramer told the viewers of his "Mad Money" TV show Wednesday, as he opined on the pending bankruptcy of Blockbuster.

Cramer said that the death of Blockbuster means that we have to break some of our own rules.

 

Cramer said Netflix (NFLX_) is the beneficiary of Blockbuster's fall and is the new king of all things cinematic. According to Cramer, Netflix's $8.2 billion market cap is too low now that it has cornered in-home movie watching.

 

He said many would argue that Netflix, after a monster run to the upside, is just too expensive. That's where the rule breaking comes in. Cramer said that normally stocks are measured on their price-earnings ratio, and normally he's willing to pay a multiple that's twice a company's growth rate. But in the case of Netflix, other metrics need to be used.

 

Cramer said that when a stock punches through his price-earnings metric, he looks at the company's value as a takeover target. In the case of Netflix, there aren't any likely suitors, so Cramer moved to a third valuation metric, one he said needs to be used with caution.

 

Cramer said his final valuation metric is the notion that a company's market cap is simply too small for its market opportunity. This metric works for a stock like Salesforce.com (CRM_), which is highly valued, but still far too small for a stock that could become the next Microsoft (MSFT_) or Oracle (ORCL_).

 

Cramer said only a few stocks fit into this group of valuation exceptions. Akamai (AKAM_) is another one, he said, as is Amazon.com (AMZN_), a stock that's only valued at twice that of Target (TGT_), despite being the world's largest online department store. Cramer said Amazon is worth $177 a share.

 

And that's why Netflix, despite its 10 point gain today, is still a buy, said Cramer.

[keerthiprasad]

 

Cramer said his final valuation metric is the notion that a company's market cap is simply too small for its market opportunity. This metric works for a stock like Salesforce.com (CRM_), which is highly valued, but still far too small for a stock that could become the next Microsoft (MSFT_) or Oracle (ORCL_).

[/color]

 

hmm....I think the name for this metric is "speculation" lol.

[T-bone1]

that's great stuff, thanks longinvestor

[Guest HarryLong]

I'm bruised up on this one.  Short since 110.  Been adding to the short along the way.  Started just with puts, now shorting outright.

 

I look at it from a porters five forces perspective:

 

Bargaining power of suppliers: Extremely high.  Suppliers have typically earned the economic profits in this industry

Bargaining power of customers: Extremely high.  Very low switching costs.

Threat of New Entrants: Extremely high.

Threat of Substitute Products: Extremely High. (Redbox, apple, walmart, pay-per-view)

Rivalry: Low.  This is the only factor helping nflx right now.  With blockbuster in chapter 11, there has been more than enough business to go around for rival redbox.  And other rivals have to catch up.

 

In total, I see this eventually eating away all of the profits of nflx.

 

Buddy, it's none of my business, and I hate to give any specific advice, so I won't, but have you ever considered some basic risk control things like stops on your shorts, etc?

 

If you don't practice proper risk control, you're playing with fire without any water nearby.

 

If you get stopped out, you can go through a cooling off period of 3 weeks to a few months, and after that, you can always try again if you absolutely have to short something. Of course, these are just general comments, I know nothing of your financial situation, I do not give financial advice, I am not a financial adviser, etc, they're just my personal opinion.

[Myth465]

I think shorting a story stock is a bad idea in general.

 

I could pitch this / FFH/ SD / FBK / any other value idea to my friends and coworkers, and they would all buy this. Blockbuster just went bankrupt, and Netflix is the only game in town except for Red Box. Thats a great story, everyone is buying, and then justifying. Humans are rationalizing creatures, not rational ones. Hell I would love to own it, but the little value investor inside wont let me buy. I would short a crippled company with no many that is bleeding cash in a horrible industry if I had to.

 

 

[T-bone1]

I agree Myth and Harry . . . I think valuation wise (and business prospects wise), this short is as compelling as any long I've ever seen, but the dynamics of shorting make it a much worse bet.

 

I think NFLX is worth about $50 and CHK is worth about $60 (NFLX trading at 3 times my valuation, CHK for 1/3) . . . but if both prices move to my values, I only make 66% on NFLX, while I make 200% on CHK.

 

I may never short an exciting company again. I think GMCR is similary valued and similarly scr*wed as NFLX (losing pattent protection on their K-cups), but there are just too many headwinds (return dynamics of shorting, when it moves against you it becomes a bigger rather than smaller position, long investors are crazy, etc.).

 

I am not covering NFLX, and I expect to make money on the position, but this has been a painful lesson. I think I would rather be 30% cash than 100% long and 30% short, even if they shorts are trading at ten times the value of my longs.

[Guest Bronco]

What's the expression .... being right vs. being early.

 

You can be right on a short idea, but if you are early - you have to be able to absorb a lot of pain.

 

 

Netflix and Green Mountain - we all can see they trade at high valuations.  But to one person's point, the puts are expensive.  And why wouldn't they be.

 

 

The question for these new exciting businesses is how long will it really take for performance to catch up to their valuations.  2 years? 5 years?  Never? 

 

To me, this is more trading than investing - and I am the world's worst trader (maybe second worst behind Jim Rogers).  I prefer the investing route.

 

[beerbaron]

My guess is traders are getting bored of this sideline market, so they go back to what they know best... invent stories and sell the dream.

 

BeerBaron

[watsa_is_a_randian_hero]

Buddy, it's none of my business, and I hate to give any specific advice, so I won't, but have you ever considered some basic risk control things like stops on your shorts, etc?

 

If you don't practice proper risk control, you're playing with fire without any water nearby.

 

If you get stopped out, you can go through a cooling off period of 3 weeks to a few months, and after that, you can always try again if you absolutely have to short something. Of course, these are just general comments, I know nothing of your financial situation, I do not give financial advice, I am not a financial adviser, etc, they're just my personal opinion.

 

i think stops are a bad risk control tactic.  I think a better risk control tactic is position sizing. 

[Guest HarryLong]

Buddy, it's none of my business, and I hate to give any specific advice, so I won't, but have you ever considered some basic risk control things like stops on your shorts, etc?

 

If you don't practice proper risk control, you're playing with fire without any water nearby.

 

If you get stopped out, you can go through a cooling off period of 3 weeks to a few months, and after that, you can always try again if you absolutely have to short something. Of course, these are just general comments, I know nothing of your financial situation, I do not give financial advice, I am not a financial adviser, etc, they're just my personal opinion.

 

i think stops are a bad risk control tactic.  I think a better risk control tactic is position sizing.  

 

You're a very amusing fellow. As you will remember, when a stock you're short of rises, your short position size actually increase, so your argument about position sizing as risk control is circular.

 

"If you think about it a little more, I think you will agree with me, because you're smart, and I'm right."  ;D

 

But of course, what do I know? You've been short NFLX since 110 according to your previous post!  ???

 

The real answer is, of course, that you should do whatever you want. It's your money, and as far as I've seen, it's still legal to lose money (although my sense is the government would like to outlaw it). You can lead a horse to water, but you can't make it drink. I've made plenty of mistakes myself in this world, so who am I to poke fun?  ;D

 

Of course, as good old Ben said, only a fool needs to learn from experience, and I have sure had some experience! On the other hand, you've been brave enough to bare your faults, and I'm being harsh, so what I don't want to do is let my ridicule have the effect of you clinging to a position even more dearly had I said nothing, out of pride for your process. You could be totally correct, and I could be totally wrong. That's what makes a market. The real question is, if you are wrong (even if there is only a tiny % chance of that in your mind), at what point do you throw in the towel, if ever?

 

It's just that with friends, I have been more diplomatic before, and have seen at least one of them get wiped out.

 

Bottom line, you seem like a smart fellow, so you are perfectly capable of making up your own mind. It is none of my business, and I will do my best not to continue posting on this issue, even if I am tempted to. Just remember, in the end, as PTJ said, you first need to protect your a$$. If you lose your stake, you can't take on the next position for a while until you save another stake. Tactically, you are in a very different position (unless you are at an insurance company, or I'm making wrong assumptions about you), from an insurance exec who has to put million of dollars to work every month/quarter/year. Tactically, you need to protect your capital in a much more active way (if my assumptions are correct). However, your tactical advantage is that you can move fast, without committees or much market impact (if my assumptions are correct). Use your advantages and be mindful of your tactical disadvantages. As you know, in an extreme case, Buffett can take over a company that continues to drop and get control of the cash flows, and make his money that way. Most likely, you can't, so you need to approach risk control differently (if my assumptions are correct).

 

But again, do what you want. I am not qualified to give you advice, I do not know your financial situation, and I am not a financial adviser.

 

As J.G. said, one can walk through a dynamite factory with a lit match and live, but it's still foolish to do so. Of course, maybe I'm the foolish one. Only time will tell.

[watsa_is_a_randian_hero]

eh, we'll see what happens.  my point is with sizing is that nflx doubling from here may be a drag on my performance, but its not going to put me out on the streets.  And as long as my cost to borrow doesnt rise (in which case i would buy deep in the money puts), then I can afford to be patient on this one.

[T-bone1]

You could be totally correct, and I could be totally wrong. That's what makes a market.

 

 

Harry, congratulations on such a good trade. You have certainly been on the right side of this. I am curious, as I have talked to other NFLX longs, what exactly is your thesis? If watsa_is_a_randian hero is either right or wrong in his short thesis, I am curious what you are right or wrong about. You have certainly been right about the stock price, but what do you expect to happen from here? Do you have some theory on how the company will grow into this type of valuation, or how they will handle the rising cost of content and increased competition? As I said, I am short the stock, but I'm not trying to be confrontational. If I am wrong about the company (I've certainly been wrong about the stock so far), I'd like to learn it immediately from you and cut my losses rather than continue to lose money.

 

thanks

[bargainman]

I remember seeing the strategy slides for NFLX.  Their idea was to drive watch now usage which would eventually reduce postage costs and increase margins.  I sold my NFLX around 138.  But I would never short them.  I once read an extremely compelling short analysis by a very good investor who I really respect and has a tremendous record.  It was on AMZN.  The stock proceeded to from from overvalued to supremely overvalued.  My rule after that has been.. never ever short a strong company no matter how high the valuation.  Find crummy companies with lots of debt, incompetent management, no advantages etc etc, and short them.  NFLX is a strong company with a visionary CEO that revolutionized an industry.  If I were to short them I'd either buy call options to protect myself or just do puts...  Shorting story companies with great CEOs is just not my cup of tea...

 

my 2 c.

[Guest HarryLong]

You could be totally correct, and I could be totally wrong. That's what makes a market.

 

 

Harry, congratulations on such a good trade. You have certainly been on the right side of this. I am curious, as I have talked to other NFLX longs, what exactly is your thesis? If watsa_is_a_randian hero is either right or wrong in his short thesis, I am curious what you are right or wrong about. You have certainly been right about the stock price, but what do you expect to happen from here? Do you have some theory on how the company will grow into this type of valuation, or how they will handle the rising cost of content and increased competition? As I said, I am short the stock, but I'm not trying to be confrontational. If I am wrong about the company (I've certainly been wrong about the stock so far), I'd like to learn it immediately from you and cut my losses rather than continue to lose money.

 

thanks

 

Well, as Kenny Rogers said:

 

He said, "Son, I've made a life, out of readin' people's faces

And knowin' what their cards were by the way they held their eyes

So if you don't mind my sayin', I can see you're out of aces

For a taste of your whiskey I'll give you some advice"

 

So I handed him my bottle and he drank down my last swallow

Then he bummed a cigarette and asked me for a light

And the night got deathly quiet and his face lost all expression

Said, "If you're gonna play the game, boy, you gotta learn to play it right"

 

You got to know when to hold 'em, know when to fold 'em

Know when to walk away and know when to run

You never count your money when you're sittin' at the table

There'll be time enough for countin' when the dealing's done

 

Every gambler knows that the secret to survivin'

Is knowin' what to throw away and knowing what to keep

 

;D

 

If that doesn't work for you, read the cash flow statement a bunch and tell the board what you think their annual cash flow will be next year  ;D

[Myth465]

You guys stop screwing up the quotes.

 

One of the reasons I think Harry is an asset to the board, is  he understands the market isnt rational and doesnt try to fight it. Thanks for the Kenny Rogers quote.

 

 

Also the CEO could issue a bunch of stock to buy cheap assets screwing up your thesis. Its what I would do if I thought my stock was overvalued.

[Guest HarryLong]

I'm just a poor boy from Houston. We're simple folk down here. I don't know anything about highfalutin' things like theory this, or theory that.

 

As my friend Johnny used to say, "every man has to find his own way home."

 

A good stock is like a good woman. When you find one, you should stick with it.

 

Big city people with their big city ways try to complicate things.

 

That's 'bout all I have to say on the subject of NFLX  ;D

[Sea Island]

Do you simple folk in Houston have blind squirrels?

[hyten1]

i don't know enought about this industry

 

i am alwasy curious why hasn't amazon gotten into the nflx game, not the dvd mailing one but the subscription online streaming one.

 

 

right now you can already download/watch online call kinds of movie/tv show on amzn, but its just too expensive. i would like for amzn to have some short of subscription model that allow me watch whatever i want

 

also i have sense stop using itunes (i hat itunes, the software etc etc). I bought my music from amzn, not only is it mp3, its just so much easier and not tie to me down to itunes.