Whitney Tilson: Why We Covered Our Netflix Short

http://seekingalpha.com/article/252316-whitney-tilson-why-we-covered-our-netflix-short

by njohnw • 15 years ago

63 37 15 years ago

jdp23• 15 years ago

Here was Reed Hastings' response to their bearish recommendation in December: http://seekingalpha.com/article/242653-netflix-ceo-reed-hast...

wallflower• 15 years ago

> Streaming adoption will likely follow the classic S curve, and we’re still on the first part (acceleration) of the S curve. Since we expanded into streaming, Netflix net subscriber additions have been 1.9m in 2008, 2.9m in 2009, and over 7m this year (estimated). While saturation will happen eventually, given the recent huge acceleration of our business specifically, and streaming generally, saturation seems unlikely to hit in the short term.

barista• 15 years ago

WTG NFLX! More power to you. You allowed to me stay free of Cable for last one year. Love you.

Hastings made the right bet by focusing on the streaming. That's clearly the future and I'm glad they are planning to go ahead with streaming delas with full steam. Hope the studios realize this and partner with them.

Qz2• 15 years ago

The main reason I'm not a netflix subscriber is that I would never get anything done because I'd be sitting around watching video all day.

ryanmolden3• 15 years ago

Pretty sure the studios, once Netflix is all/mostly streaming will simply change the licensing costs to pilfer most of the profit, why wouldn't they? Without their content Netflix has nothing. Before they were insulated from this via the First Sale Doctorine and distribution through the mail. If they go all streaming the content producers can change licensing costs (already happening) and there is almost no barrier to entry (anyone can stream videos, see Hulu, Amazon, etc...) As a consumer I love Netflix streaming, from a business perspective it seems like a bad idea. Let's hope I am wrong.

brown9-2• 15 years ago

But without Netflix, how valuable is their content?

ryanmolden3• 15 years ago

They seem to have survived pre-NetFlix, and there are Netflix alternatives...so I would say 'pretty valuable'.

trunnell• 15 years ago

there is almost no barrier to entry

Yes, anyone can stream videos. But not everyone can buy the rights, which are sold in exclusive windows.

Every title is only licensed to one entity in each window. This system was designed for pay-TV channels that wanted exclusive rights, and the studios found that it was a good way to maximize revenue. So after a movie leaves the theaters, there are a series of these licensing windows, each lasting about 1-2 years. This is why a movie that's on HBO will never be on TBS simultaneously.

Buying content within a window is essentially like an auction. The highest bidder wins. It's possible to enter the market, but to do so you actually need a lot of capital to bid and win content.

studios... will simply change the licensing costs

Reed publicly stated that a major goal in the future is to pay studios more for content. And that's only fair as we increase the number of viewers.

Disclaimer: I work at Netflix.

ryanmolden3• 15 years ago

>Buying content within a window is essentially like an auction. The highest bidder wins. It's possible to enter the market, but to do so you actually need a lot of capital to bid and win content.

I think Amazon has sufficient capital to go to auction, also, in general, capital comes 'cheap', if someone has a business plan with a reasonable shot at success they can get VC money. If your expectation that a barrier to entry is purely capital costs, well...you better hope no investors want to back a competitor, there is plenty of money out there.

>Reed publicly stated that a major goal in the future is to pay studios more for content. And that's only fair as we increase the number of viewers.

Well, from a business perspective fairness isn't what matters, he should strive to retain as much of the 'pie' for Netflix as possible. His concession that he 'wants' to pay content producers more seems like PR, more likely he has no choice. It is good and fine to say you want studios to make more money on content, but I don't think history has shown either the movie or music industry care terribly much about how much profit their partners make, and they can drain any profit by increasing licensing costs anytime they want no? The more successful you are in streaming it seems the more you are exposed to this risk.

icarus_drowning• 15 years ago

Has anyone else noticed a distinct dive in Netflix streaming quality over the past few weeks? I used to be able to watch their full HD videos nearly instantly, and now I'm lucky if I get the lowest quality-- about half the time videos won't even start.

I haven't changed anything on my end that I'm aware of. Still, I can't believe this is all on Netflix's end, can it?

RickHull• 15 years ago

Your ISP likely is throttling Netflix data.

SoftwareMaven4• 15 years ago

Don't use Google's DNS or Open DNS. That screws with the CDN endpoint you are given and drastically hurts performance.

thorax• 15 years ago

Holy cow-- I never thought about this. Thank you so much for mentioning because it might explain our sometimes weak streaming performance for different sites.

cdr• 15 years ago

If that's so, what do you do if your ISP's DNS is terrible? Try to find a better one that's still geographically close?

wiredfool3• 15 years ago

Would that likely be a general problem with CDN's or is it specific to just Netflix?

scotch_drinker• 15 years ago

I think the most important part of the article is the quote at then end saying that just because they aren't interested in buying it doesn't make it a good short. The market can stay irrational longer than you can stay solvent and all that.

75x trailing earnings in the current economic environments SEEMS expensive to me. I'd be willing to bet (but not with real money) that it will be cheaper in 12 months. Of course, as a Netflix subscriber, I'm glad the streaming side of things is going so well.

borism• 15 years ago

75x trailing earnings in the current economic environments SEEMS expensive to me.

It seems the same to me as well, but markets seem to disagree. The riskier the bet, the more willing today's market seems to be willing to accept it.

wiredfool3• 15 years ago

Netflix seemed expensive to me in the $120+/share range. Even in the $100/share range, it wasn't where I was going to buy.

The market isn't rational, and it's going to be irrational with a lot more force than I can muster.

3am2• 15 years ago

If you assume 30% growth for 5 years, dropping to 8% after that with a discount rate of 11%, then the $3 EPS implies a price target of $260. DCF derived targets imply some crazy valuations in high growth situations...

That said I wouldn't buy NFLX either. But I wouldn't want to be short when 1/3 of the float is. If AMZN buys them out that would be the mother of all squeezes.

nrao123• 15 years ago

A substantial part of your $260 valuation Comes from Terminal Value (I.e. Post 5 yrs) And a 8% perpetual growth rate is an extremely aggressive rate.

Basically, to justify the current value, The 5 year CAGR has to be way, way higher than 30%

jordanb• 15 years ago

This is one of the most important things that those "if you're so sure Apple/Gold/etc is overvalued why don't you short it?" people ignore.

Maintaining a short position is expensive. And even if you can afford it, holding it for too long can kill any upside you get when it finally does collapse. I can say that Gold is overvalued but I won't short it, and be perfectly consistent in saying that, because I admit that I have no idea how long it'll take for the bubble to pop.

aspiringsensei• 15 years ago

>Maintaining a short position is expensive

Short positions on companies like Netflix should be initiated using capped-loss derivatives instead of assuming the unlimited risk of selling the company's stock short.

Buying a long-dated put option is often the best way to short something, assuming you have conviction.

DevX101• 15 years ago

Unless you know something everyone else doesn't (which would make this illegal), it's never a good idea to short a high valuation stock. Sure it may be overpriced, but you have to be one hell of an oracle to predict WHEN that correction will come.

If you insist on doing this, do it soon after the house of cards start to fall, but not before.

But kudos to this guy for adjusting his firmly held thesis. When money's on the line, it seems people are willing to reject their prior wrong beliefs much more easily.

underdown• 15 years ago

Sounds like Hastings charmed them.

I'm a Netflix streaming subscriber and even though it's so cheap - I'm considering canceling because they don't bring enough new content online for me to get value from the service.

Bud• 15 years ago

You really can't get one movie's worth of value out of it per month, even with the extensive catalog of older stuff they have? Cause that's all you really need to get out of it to make it worthwhile...

I'm finding Netflix streaming over the $99 AppleTV to be an incredibly better deal than paying $70-$80 a month for digital cable.

chime• 15 years ago

My wife and I use Netflix differently than you. Netflix is not what's new but what's good. And over the past year we have discovered that there is a lot of good content on Netflix, you just have to change your viewing habits. We don't look for a movie released last year. We look for a sci-fi movie with a time-travel theme or a comedy show about evil corporatations. Also, I highly recommend instantwatcher.com to find good stuff to watch.

CamperBob• 15 years ago

Netflix is not what's new but what's good.

Exactly. It's like the early days of DVD -- you had people whining and moaning about the lack of Star Wars or Titanic, when there were already more great films in release than you'd ever have time to watch. Netflix streaming works the same way -- you can't turn on the TV with the intent of watching a specific Hollywood A-list movie, but if you turn on the TV with the intent of watching something good, you will not be disappointed.

cicero• 15 years ago

Is anyone concerned about a backlash from ISPs over Netflix bandwidth consumption? Many ISPs provide a video on demand service, but instead of getting revenue for video on demand, they have to beef up their Internet infrastructure to support a competitor. I would think this imbalance would bolster their case against net-neutrality or justify charging for bandwidth usage, which could upset the economics that make Netflix profitable.

paul9290• 15 years ago

I recently became a subscriber and even if it does not have the latest movies i dont care because like Pandora it learns what you like and thus the recommendations are great. Another thing I love about it is the random DC comic cartoon/movies Ive watched like Batman/Superman and Superman and Shazam.

Whitney Tilson: Why We Covered Our Netflix Short

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