NFLX - Netflix

[no_free_lunch]

I am thinking of netflix as a short.

 

There is a lot of competition coming at them.  Apple, Disney, Amazon, HBO, etc..  Meanwhile they are shifting more and more to original content.  Personally I just don't care for what I see on Netflix and am thinking of cancelling it.  Others I have talked to feel the same.  Curious to see others opinion on the board.

 

Against that backdrop, they are selling for 10x revenues and something like 100x earnings, while their growth rate has slowed.  For current price they don't need to experience subscriber drawdown to crash the stock, I feel they need strong growth just to justify the current price.

 

I am thinking of this as one part of portfolio protection.  I would like to allocate 1-2% of portfolio to LEAP puts, and this may be one of them.  I know it is far from guaranteed that NFLX drops but I think they could drop more than the average in a decline and I think they could drop despite the market at large. 

[5xEBITDA]

 

I am thinking of this as one part of portfolio protection.  I would like to allocate 1-2% of portfolio to LEAP puts, and this may be one of them.  I know it is far from guaranteed that NFLX drops but I think they could drop more than the average in a decline and I think they could drop despite the market at large.

 

Sounds like a lot of uncertainty and headache for a small portfolio position that would ultimately have negligible impact on your results event if the short worked out very well.

[rkbabang]

I love Netflix and won't be cancelling it, but the price does seem more than a bit rich right now.  My only caution would be that I think they have the ability to raise prices more than they have.  Enough to justify the current price?  I don't know.  And I see Amazon, HBO, DIS+ as complements to NFLX rather than replacements.  You can subscribe to all of them, cancel cable, and still save a significant amount of money every month. 

 

[bizaro86]

Yeah, I am not long netflix, but wouldn't consider shorting it. The math for growth is really compelling here, especially because price increases and member growth have a multiplicative effect. So I think they can get significant revenue growth for years in a business where a significant portion of the costs are fixed, so operating leverage should be very high. A business like that deserves to trade a very high multiple...

[johnny]

I don't think Netflix has all that much more room on pricing per se.

 

I think the real danger for a short thesis is that Netflix still has the ability to bring down the account sharing hammer. My entire family shares my Netflix account, and this is like ~4 distance physical residences. If they tried to tell me I needed to pay $30 a month I'd tell them to get lost, but if they figured out some way to keep my sisters and parents off my account and hit each of them up for $10, I'm sure they'd all cave.

[bizaro86]

I don't think Netflix has all that much more room on pricing per se.

 

I think the real danger for a short thesis is that Netflix still has the ability to bring down the account sharing hammer. My entire family shares my Netflix account, and this is like ~4 distance physical residences. If they tried to tell me I needed to pay $30 a month I'd tell them to get lost, but if they figured out some way to keep my sisters and parents off my account and hit each of them up for $10, I'm sure they'd all cave.

 

They won't raise to $30. They'll raise it $1/year for the next 10 years.

[LongTermView]

I am thinking of netflix as a short.

 

There is a lot of competition coming at them.  Apple, Disney, Amazon, HBO, etc.. 

 

That kind of sounds like this https://seekingalpha.com/article/242320-whitney-tilson-why-were-short-netflix 2010 article where Whitney Tilson explained why he was short at the time:

It does have a brand name and 16.9 million customers, but Netflix's brand and number of customers pale in comparison to its new, direct competitors like Apple (iTunes), Google (NASDAQ:GOOG) (YouTube), Amazon.com (NASDAQ:AMZN) (Amazon Video on Demand), Disney (NYSE:DIS) and News Corp. (NASDAQ:NWS) (part ownership of Hulu), Time Warner (TWX, TWC) (cable, HBO, etc.), Comcast (NASDAQ:CMCSA) (cable, NBC Universal, part ownership of Hulu), and Coinstar's Redbox (NASDAQ:CSTR) (30,000 kiosks renting DVDs for $1/night and email addresses for 21 million customers).

 

In short, Netflix is moving from a business in which it was competing against smaller, dying, heavily-indebted companies with inferior business models to some of the largest, most powerful, aggressive and deep-pocketed companies in the world, which have big competitive advantages over Netflix.

 

Disclosure: I'm long nflx.

[dwy000]

I am thinking of netflix as a short.

 

There is a lot of competition coming at them.  Apple, Disney, Amazon, HBO, etc.. 

 

That kind of sounds like this https://seekingalpha.com/article/242320-whitney-tilson-why-were-short-netflix 2010 article where Whitney Tilson explained why he was short at the time:

It does have a brand name and 16.9 million customers, but Netflix's brand and number of customers pale in comparison to its new, direct competitors like Apple (iTunes), Google (NASDAQ:GOOG) (YouTube), Amazon.com (NASDAQ:AMZN) (Amazon Video on Demand), Disney (NYSE:DIS) and News Corp. (NASDAQ:NWS) (part ownership of Hulu), Time Warner (TWX, TWC) (cable, HBO, etc.), Comcast (NASDAQ:CMCSA) (cable, NBC Universal, part ownership of Hulu), and Coinstar's Redbox (NASDAQ:CSTR) (30,000 kiosks renting DVDs for $1/night and email addresses for 21 million customers).

 

In short, Netflix is moving from a business in which it was competing against smaller, dying, heavily-indebted companies with inferior business models to some of the largest, most powerful, aggressive and deep-pocketed companies in the world, which have big competitive advantages over Netflix.

 

Disclosure: I'm long nflx.

 

I'd never short a momentum stock but why do you feel it is a long here?  Not why is it a great product or business but why is $370/share a cheap price to pay?

[LongTermView]

I'd never short a momentum stock but why do you feel it is a long here? 

They have 149 million global streaming paid memberships. Spreading the cost of content out to this many customers allows them to easily outspend competitors. Once they reach a more steady state then the per-share economics will be rewarding imo.


 

Not why is it a great product or business but why is $370/share a cheap price to pay?

I just chimed in because the short thesis sounded familiar from what was said in 2010 and the stock has gone up quite a bit since that time. It wouldn't be right to chime in without disclosing my position. I'm still long but I bought it at a lower price than $370. For me it isn't so much that $370/share is a "cheap price" to pay, I see it more as a wonderful business at a price that isn't unreasonable.

[Liberty]

Good stuff as usual by Matt Ball:

 

https://redef.com/original/quality-is-a-distraction-if-it-exists-at-all-netflix-misunderstandings-pt-6

 

https://redef.com/original/netflix-is-resilient-because-its-rarely-competing-netflix-misunderstandings-pt-7

 

 

[glorysk87]

I'd never short a momentum stock but why do you feel it is a long here? 

They have 149 million global streaming paid memberships. Spreading the cost of content out to this many customers allows them to easily outspend competitors. Once they reach a more steady state then the per-share economics will be rewarding imo.


 

Not why is it a great product or business but why is $370/share a cheap price to pay?

I just chimed in because the short thesis sounded familiar from what was said in 2010 and the stock has gone up quite a bit since that time. It wouldn't be right to chime in without disclosing my position. I'm still long but I bought it at a lower price than $370. For me it isn't so much that $370/share is a "cheap price" to pay, I see it more as a wonderful business at a price that isn't unreasonable.

 

What do you consider steady state? Said another way, what scale do you think they need to achieve to generate "rewarding per-share economics"?

[LongTermView]

What do you consider steady state? Said another way, what scale do you think they need to achieve to generate "rewarding per-share economics"?

 

I don't know, I think of Coca-Cola as being steady-state now. They're not everywhere but they've covered much of the planet. Netflix has a ways to go imo. I'm betting that when their annual paid subscriber growth slows to 10% or less then the bottom line economics will be rewarding on a per-share basis.

[Liberty]

That's funny:

 

https://www.wsj.com/articles/farmers-plow-through-movies-while-plowing-fields-11557508393

[Liberty]

https://deadline.com/2019/06/netflix-ted-sarandos-weighs-in-on-streaming-wars-agency-production-big-tech-breakups-ma-outlook-1202636595/

[Liberty]

Barry Diller interview in Sun Valley:

 

https://www.cnbc.com/video/2019/07/10/media-legend-barry-diller-dont-know-who-is-going-to-win-the-streaming-wars.html

[jschembs]

Can't remember the last time NFLX lost domestic subs (Qwikster?). I'm sure they'll get asked the tough questions on the conference call by their hand-picked interviewer.

[Liberty]

As Matt Ball says:

 

"Odds are if Stranger Things came out a week earlier, there'd be no loss, but a very different narrative.

 

Not that anything would be different (in a good or bad way)"

 

https://twitter.com/ballmatthew/status/1151595230820478977

[Gregmal]

Is this not one of the most obvious shorts right now?

 

First, market cap severely limits pool of potential acquirers.

 

Next, you've got cut throat competition with now formidable foes going live.

 

Some of these same folks hold some very valuable content that would likely put Netflix at a disadvantage. Further, for third party content the cost of acquiring this will likely only be driven up.

 

What's left? NFLX will have to piss away TONS of money on original content or pay top dollar for existing stuff.

 

Is NFLX really cheap anymore? They've raised prices so much they're basically on par with HBO and only a couple bucks less then some streaming options for live TV.

 

What sub growth is really left? Everyone I know agrees NFLX has gotten pretty stale. Numbers last Q to me were an obvious sign of a broken growth story. Heck, this even got the proverbial and ceremonious VIC writeup recently. Something I've noticed is another sign of the shift; when growth dies, and prematurely jumping in are "value" folks...still paying 100x earnings.

[cameronfen]

Is this not one of the most obvious shorts right now?

 

First, market cap severely limits pool of potential acquirers.

 

Next, you've got cut throat competition with now formidable foes going live.

 

Some of these same folks hold some very valuable content that would likely put Netflix at a disadvantage. Further, for third party content the cost of acquiring this will likely only be driven up.

 

What's left? NFLX will have to piss away TONS of money on original content or pay top dollar for existing stuff.

 

Is NFLX really cheap anymore? They've raised prices so much they're basically on par with HBO and only a couple bucks less then some streaming options for live TV.

 

What sub growth is really left? Everyone I know agrees NFLX has gotten pretty stale. Numbers last Q to me were an obvious sign of a broken growth story. Heck, this even got the proverbial and ceremonious VIC writeup recently. Something I've noticed is another sign of the shift; when growth dies, and prematurely jumping in are "value" folks...still paying 100x earnings.

 

I agree that this is more of a short than a long, but 10 to 15 dollars a month and running out of pricing power?  Compared to cable its still got way more pricing power and probably of equivalent or slightly poorer quality.  Compared to other current services like HBO, Hulu etc., is much superior in terms of quality. 

[Spekulatius]

Pricing power is more limited the thought, as the recent quarter seems to indicate. Also, new entrants like Disney and Comcast seem to be pricing their streaming services low, so that will restrict pricing power even more. Of course they have international growth, but everywhere but the US, TV tends to be way cheaper, so I am not sure how much profit margin they can generate. Using Aswath Damodaran’s valuation spreadsheet, I need dramatic increases in ARPU to justify more than $200/ share in value. The stock seems way to expensive any way I look at this. Also, their Cash flow statement looks worse than their income statement because their capitalize their content cost, so they keep adding to their debt. FWIW, It’s not an great looking operating model, as far as balance sheet and cash flow statement are concerned.

[Gregmal]

Yea I just dont see huge tolerance for price increases anymore as there are more legitimate alternatives now than ever before, whereas previously this was as simple as "I'm cutting cable and getting Netflix". Youtube I'd say is easily superior and has massive potential. Then the usual candidates like Hulu, plus now the new entrants like DIS and AAPL. So add in all of this and the assumption that content becomes harder/more expensive to acquire which will in turn lead to a lower quality catalogue...and yea, I can't see people continue to put up with prices hikes like they've been doing previously.

 

The numbers last quarter were atrocious. I was further surprised to see how much debt they've racked up as well as its been a while since I looked at it after owning it a long time ago. Things will get more expensive all around, while pricing IMO is capped, with customers becoming harder to acquire...and harder to keep. $200 is generous.

[thepupil]

Let me be clear, I will never own or short this.

 

I would on the other hand totally pay $50/month for Netflix.

[RuleNumberOne]

All that we need to understand from John Malone, is the self-reinforcing effect:

 

  buying scale => cheaper and broader content => more subscribers => more buying scale.

 

Netflix has 60m US subscribers. From what I remember, Comcast and DirecTV had around 20-24m subscribers and were the next two largest. Comcast at around < 24m subscribers had enough power to get a "MFP" clause - content owners had to give Comcast the lowest price.

 

Netflix has unmatched scale in buying power. Also unmatched knowledge of what their customers want to watch, therefore exactly how much to pay for what content.

 

Apple streaming and Disney+ are both 'upcoming'. It will take a while for people to realize that Apple is not getting anywhere and Netflix is not getting hurt. I am not invested in Netflix, just a John Malone fan. Netflix debt is very low compared to the lifetime value of their US consumers.

[Gregmal]

Well sure. Traditional media scale and content is not equal to what Netflix is. If Netlix stops adding new content the majority of their subs will leave. Especially if you keep raising prices. Comcast and DTV at least have live and consistently new and original/desirable, content. NFLX does not without spending more money. The fact that their competitors(ATT owns DTV and also has WB+HBO for instance, DIS has 21 Century Fox) can either cut them out completely or extort them is problematic.

 

I agree the AAPL product will be garbage. The point is, AAPL which has been slow AF to bring anything new to market now is launching streaming. So are others. This is just more competition for Netflix. If some of the staples in the traditional space have seen huge declines in their value ascribed by the customer(and Mr. Market) it is naive to think NFLX would be an exception. Frankly, given how large the gap is between pay TV packages like Comcast and Atice vs NFLX, there's a case to be made that this is where they should be at near peak earnings. Instead they trade and 100x or whatever and guess what...after years and years of fighting fate and sucking out profits from the traditional model(FWIW this is where autos are going as well IMO), now the big boys are coming for this space and undercutting them...but yea...they'll raise prices...without adding content/increasing spend, and their direct competitors will just continue to give them content....

 

Like I said, easy short here IMO, although perhaps I'm wrong. But what exactly are people even betting on here? That this is a $250B company? $500B? LOL WTF??? At those valuations you're basically betting on what? That they own 90% market share for all TV after finding a way to incorporate advertising revenue? With NO live content? No sports? This isn't a winner take all market and the comparisons to the dynamics of old cable are just as shoddy and the logic used by the big boys to put off dealing with NFLX for so long. It all comes down to content and if it were just about pricing then HULU would reign supreme.

 

Being long is basically assuming they are the most valuable media/content provider in the history of the world. That their current market share of 60M subs or IDK like >50% US market share of all people with a tv will increase to 60%? While every established player with ownership of better content and more resources just sits there and lets it happen?

[Cardboard]

Hastings agree with Gregmal:

 

https://www.cnbc.com/amp/2019/09/20/netflix-ceo-hastings-tough-competition-from-apple-disney-coming.html