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Netflix, Inc. Message Board

  • ktsadik ktsadik Nov 30, 2010 4:41 PM Flag

    Now Short 100,000 shares -- my thesis

    I manage a $600mm fund so this comprises a 3.5% position. A very manageable sized position which gives me the staying power to ride out market dislocations, a situation I view is currently in progress.

    Netflix has a tremendous business model and the first mover advantage in the subscription online-delivery space. If NFLX's supremacy in this arena were to be uncontested, I would be wary of a short position. However, it has been widely publicized that AMZN and Redbox (likely through WMT's Vudu) will be making waves sooner than later. Hulu is a sleeper depending on its owners' commitment (GE, News Corp, Disney) to winning in the space. AAPL and GOOG are two other players that could be serious contenders but currently seem dedicated to the ala carte model. With this impending flux of competition from well-capitalized players (unlike Blockbuster even in '06), NFLX will witness a deterioration in its financial metrics as detailed below:

    Subscriber growth - NFLX's current impressive growth is up against several factors -- the law of large numbers and increasing competition from several angles. With nearly 20mm subscribers, NFLX will find it harder to grow at prior rates given the addressable market of 125mm US and Canadian TV households combined. The management team is looking to expand outside North America to maintain its subscriber growth trajectory but I believe it will be difficult to do so given the need to negotiate oversea digital movie rights while battling the entrenched competition. Moreover, as more domestic viewing options -- regardless of price -- become available to the consumer, the smaller the pie for NFLX to feed upon.

    ARPU - As more players offer a subscription based model, the more likely there will be pricing pressure. Hulu foolishly priced its product at $9.99 which fared poorly against NFLX's prior $8.99 price point. Hulu tested various lower price points in an effort to drive demand and settled at $7.99 -- well above the previously reported $4.95 trials. This move allowed NFLX to immediately price its streaming only offering at the same price and increase its pricing on DVD delivery. This move may temporarily stem the decline in ARPU but in the longer-term, subs will trade down to lower priced DVD plans or move to streaming only and fulfill their desire for new releases through other alternatives (i.e. Redbox). In my discussion with CSTR's mgmt team, they expect a nice boost in business from these defections. More concerning to NFLX, will be how Hulu ultimately prices its service. If the new price point does not drive demand to its satisfaction, Hulu may lower its price again, putting add'l pressure on NFLX to react in kind. In 2011, Redbox will launch its digital subscription service (in partnership with WMT/Vudu probably) and will likely price it below the current offerings. In short, expect pricing power to erode in the next 6-18 months.

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    • To answer the last two posts. I am short only 3.5% of my portfolio in NFLX so I it will not make or break me one way or the other. For instance if NFLX hits my $100 target in 12-18 months, it will only contribute a 1.75% gain to the overall portfolio and vice versa if it goes up 50% (I will limit this to a 50bps loss on the overall portfolio). But I prefer to be short on this name (as long as you size it appropriately) since the imbedded volatility on the put options is so high. As long as you can wait out the current enthusiasm in the market for these type of names, I expect the position to be profitable. I did establish my short position via outright short sales and naked call options. And no I have not hedged this position with calls (once again, too pricey).

      And I am a pure fundamental analyst but I will concede that this name is driven purely by technicals and acts more like a trading vehicle than an investment vehicle. The 10mm shares trading hands are not large funds/institutions taking positions but rather volatility traders pushing it around. Ultimately, a company's valuation is determined by its fundamentals but it may take some time for that prove out. And yes, I do believe NFLX will trade down substantially once the competition in the digital space heats up. A 20 PE is very reasonable for a company that will likely be growing at 15% annually in 2013 and beyond (assuming my thesis plays out on the competitive side). The question in my mind and what I try to figure out with my model is what will 2012 earnings be. Currently I am projecting ~$5.00 but there are many variables (sub growth, churn, ARPU, gross margins, SAC, etc) that can wildly change the estimate in either direction.

      As for the agreement today, it just illustrates my point that any postage/packaging savings will be redirected toward digital content purchases. I don't believe the FilmDistrict deal is very large or meaningful (4-8 movies annually) but NFLX will need to spend big $$$ to sustain its competitive advantage over competing offerings. Hope that helps.

    • You manage that big a fund, why are you wasting time on Yahoo message boards? Let me guess, if NFLX tanks from here, you want everyone to know how much of a genius you are?

      I do agree with your assessment of why to be short, BUT why add fuel to the fire? This is exactly how PCLN got to $400. Shorting at $100,$150,200,250,300,350. The more folks shorted the higher it went because they kept beating quarterlies and forcing shorts out at higher and higher prices.

      Why short the stock anyhow? You could of used ALOT less money for 1 million shares worth of Put options with say 1-2 Years of time.
      Your a fund manager, write your own Put options.

      Are you hedged with calls on your 100,000 short or just going balls out short?

    • 250 before xmas folks do not short./

    • are you oblivious to all the places in which Netflix is integrated not to mention all the Tvs that now come with a Netflix widget?

      Law of large numbers? 20mm? That's large?

      Do you think any other streaming wanna-be has a chance streaming over Apple products et al that Neflix already has as a partner?

    • Looks like your MTR $4 target by June '10 was about 200% too high. Your credibility sucks.

    • Funny a guy who manages a 600mm fund has time to diddle his opions on a message board. Give me a break pal.

    • And what do you say if you see the headline "AAPL To Buy NFLX"...?

      • 2 Replies to ordinaryaveragguy
      • what fool would pay $10B when STARZ is up next year and represents 40% of the content value and could be purchased for $1B....thats what i would say you fool. These idiots dont even knw their shoe size never mind NFLX. This is a media fawn job cause Hasting is some Hollywood liberal turd.

      • that headline will never happen bozo. netflix has nothing proprietary and now people beginning to see the massive cracks in their business model, let alone cable now doing their own hulu type services

        its basically END GAME NOW. you better stop believing in fairy tales at this valuation. your wealth is at stake now

    • I couldnt agree with you more breakem. Selling and buying by mutual funds is a norm for the end of the year. As well the insti's have increased back up to 90%. Remember they fell down to 83%. But who am i to fight them. I got in at a great price and as pandy said when the tide comes in it lifts all boats but the ones that have holes in them. I am just one of thjose boats that is being lifted up. Should i apologise to make things better. Then i will i am sorry i got lucky and stayed with the ship.


    • I was trading shares alot earlier but havent bought any since the 160 range and they are gone, got it sport.

    • Before last quarter. No link sorry pandy. Because i am a very stubborn person. I see the game changing but not as radical as all you all think. Plus i have NO idea what RH and the board have up their sleeves. Do you all?

      Subs your a pretty soar looser especially to a 10 yr novice who has kicked your butt

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