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.
Gross Margins - Margins should benefit from the shift to streaming only plans but I would suspect a fair portion of the savings in packaging/shipping will be diverted to grow its digital content. As competition heats up for a finite amount of content, these costs will only rise. Hulu has a distinct advantage in that its owners will give it access to content (Universal, 20th Century, Disney) at a fraction of the cost that NFLX pays. Moreover, a renewal with Starz will likely be higher than most analysts project given the likelihood of several new bidders (Hulu, Redbox, GOOG, etc) to enter the fray and Starz's desire to maximize/protect value given the erosion of its own subscriber base (why pay $15/mo for Starz when you can get it for $7.99 via NFLX). As such, I do not expect margins to benefit or erode substantially from current levels absent pricing pressure.
Marketing - As word of mouth has grown coupled with diminished competition, NFLX has been able to save on its SAC. I believe this will be a temporary phenomenon as NFLX is forced to defend its turf as competition heats up.
Churn - This metric will be a function of NFLX's decision on pricing relative to the competing offerings and marketing dollars spent by new entrants. If NFLX remains the low priced provider, churn will likely be subdued. However, Hulu and Redbox will likely contest that position.
Another concern was just publicized yesterday and completely ignored by the market -- a signal of the market's current irrational behavior. Comcast and the other CSTs will get paid one way or the other for the massive amount of data being transmitted through its pipes. If the FCC allows its fees to stand with Level 3 and other like providers, these costs will be passed onto NFLX. Granted, NFLX currently only pays about $0.05 per hour of content so it's amazingly cheap. If the FCC doesn't allow the new fees to hold, Comcast will likely institute a tiered pricing model based on consumption similar to cellular providers. Such a move will jeopardize the current value proposition NFLX holds in the marketplace.
With NFLX's future earnings being far from certain, it is mesmerizing to see investors/traders paying multiples in excess of 50x forward projections. If NFLX had a monopoly on its market, I could accept the argument that it will grow into its valuation like many other previous high growth companies. But it doesn't and that fact will become painfully obvious over the next year. I would encourage any long-term investors to take this gift and cash out before rationality returns or higher capital gains taxes -- whichever comes sooner. Either way, I believe the action over the past few weeks will mark the height of insanity surrounding this name.
It's all about the content and the connectivity (last mile). Netflix is just one of many middlemen - first and best to market- but about to be smothered in competition and pricing pressures.
The real way to play this trend is the ISPs or content cos.
You are clearly saying that we are very near the top and to get ready for the bottom to fall out.
Do you have any speculative thoughts on how/when this will play out over the next year with NFLX and competing interests?
Cant disagree, but add on top of that they are misrepresenting the extent of streaming subs and TV Everywhere issue you sum up the short case nicely.
However NFLX mgt has done a JOBS by creating no upside expectations to earnigns this qrt instead pointing the lemmings to sub growth which may do well including the free bees of course this qrt. CSTR to me is a non-event till 2H11 as VUDU has not even created a PC front end to their service instead using Boxee.
Does this remind you of CROX a few years ago? They were first to the market with foam shoes, everyone had them, paid too much for them,etc. Then the "knockoffs" started crowding the market and CROX tanked.
Glad you're not one of my investors then. But I think their more concerned with my monthly performance than what I write on a message board. I did this more for the retail investor who might come across it. Might appreciate it, might not. Believe me, I don't spend much time here... I find it more valuable talking to management team, associates and analysts. I'm short at an effective price of $198. So I'm down about 5% on a 3.5% position. This has cost me 17bps.
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
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.
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
The dude is a FRAUD. Just check out his past comment about NFLX...(6 months ago). Money Mgr my a-hole.