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Netflix: Will This Movie Ever End?
By Dian L. Chu, EconForecast
After driving Blockbuster out of business and taking a good chunk of subscribers from cable TVs, Netflix (NFLX) is now setting sight on the streaming video business. On Monday Nov. 22, Netflix announced a new subscription service--$7.99 a month for unlimited downloads of movies and television shows, while raising prices (by one dollar) on its existing DVD-related service plans.
This officially moves the DVD rental king onto the turf of heavy weights like Apple (AAPL), Microsoft (MSFT) and Amazon (AMZN), who are all competitors in video-on-demand (VOD) service.
Smooth Sailing So Far
So far, it has been smooth sailing for the California-based company. Netflix went public in 2002, and its mail DVD rental with no late fees model essentially sent Blockbuster packing into Chapter 11 (albeit a lot has to do with Blockbuster’s inability to adapt to new trend and technology.)
In addition to the mail DVD rental business, Netflix also has morphed into a formidable internet content provider, setting itself apart of the competition by successfully rolling out a slick Internet video streaming service in 2008, directly to a subscriber’s TV set, bypassing the cable box.
Netflix stock has really taken off since 2008 –up 800% in two years, as Netflix was probably one of the very few companies that were growing and profitable during the Great Recession.
Helped by the Great Recession
To many newly unemployed, or making less income, or just trying to save more, it is an easy choice among cable, movie theaters and Netflix. With Netflix, you basically pay a flat monthly fee (for as low as around $9 a month) and can watch as many DVDs (as fast as you can return them) plus unlimited streaming.
So, it is of no surprise that for the first time, cable TV subscriptions fell in the United States in the last two quarters, which many attributed to the rising of Netflix.
Netflix now boasts a large customer base of 16 million customers. A recent study by Sandvine, an Internet traffic consultancy, shows that Netflix’s peak viewing period is the same as TV’s prime time--8 p.m. to 10 p.m.--and accounts for more than 20% of non-mobile North American Internet use.
Growing Pains – Subs & Revenue
However, just like any business, Netflix seems to be approaching the peak of its cycle. That is, it is becoming more difficult to grow subscribers as well as revenue, which is probably a big part of the reason it is going digital right now.
Its average monthly revenue per user (ARPU)--$12.12 in the third quarter--has been declining due to the rapid growth of new subscribers at the lowest rate tier ($8.99/month). Now, with its new streaming service plan, the company expects more subscribers to increasingly shift to streaming digital content.
On the other hand, if there is a significant number of new and converted digital subscribers as expected, the new streaming service price—$7.99/month--would mean further deterioration of revenue per subscriber, which is one of the major revenue and growth metrics.
Growing Pains – Cost Control
Furthermore, Netflix already disclosed that it had $1.2 billion in commitments to pay for streaming content in Q3, up from just $115 million at the end of last year. And since its streaming library is still quite limited without the depth of its DVD content, Netflix will need to increase its streaming selection.
And inevitably, content will only get more and more expensive, which would suggest ever increasing fees putting margins under pressure.
In its Q3 earnings call, management guided long term gross margin between 30% and 35%, and expected to control costs partly by reallocating postal cost to content cost with more streaming only customers. While this still remains to be seen, the more likely scenario is that DVD and streaming will coexist side by side so long as each has enough differentiation serving different target audience. So, that would also suggest Netflix cost model could go up, e.g., on postage as well as on marketing.
Subs, Scale & Technology
One strength of Netflix is its ability to leverage technology to rapidly scale its business with 58 highly automated distribution centers that can serve 97% of the subscriber base with one-day turnaround. As such, it is hard to imagine any new entrants would cough up a sizable investment just for a match-up.
So, for now, Netflix’s large subscriber base, scale, distribution, content and technology lead may position the company as the first mover with a niche in the VOD sector.
Not in Kansas Any More
Nevertheless, streaming is not your brick & mortar video rental business. The sector is highly competitive with quite a few big players (with deep pocket) vying for a piece of the pie. With the tech sector today, it is just a matter of time before Apple, Microsoft, Google, or Amazon would come up with some kind of rivaling technology and deployment network.
Who Wins the Dog Fight?
Meanwhile, cable companies, aka crucial-for-streaming broadband providers, and movie studios, aka content owners--with some turned streaming service providers--are also likely to pose either as threat and/or obstacle to Netflix. And frankly, it is hard to say Netflix would come out as the winner if it has to lock horns with any or all of the big players over the movie and TV streaming business.
Valuation Assuming HBO 2.0
From a valuation standpoint, the stock has been on a huge tear with a current P/E of 72.86 (the average P/E of S&P 500 is around 22), and is clearly priced as the future "HBO 2.0". But from what we discussed here, Netflix ultimately could be heading towards low 30% gross margin area with around 10% net profit, which is a far cry from such a rich valuation. ???
???
A Momentum Stock
From a technical perspective (see technical chart), there are definitive indications that the stock is very overbought and prone to volatility, particularly around the earnings release time.
Source: Stockcharts.com
Current chart shows the next resistance level should be around $200, support at around $170, then $150 respectively, with major support at $120. If it breaks $120....look out below.
For long investors already in position, $170 would be the level to cash in on some profits.
Last but not least, bear in mind that this is one of the few classic momentum stocks, i.e., when the the current uptrend breaks, it tends to fall hard and fast.
Dian L. Chu, Nov. 26, 2010 
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Blockbuster generated $470mm in rental revenues during the quarter just ended; Despite the suggestion, Netflix has not "put them out of business". Secondly, cumulative capex for NFLX during the past ten years is $260mm, so if a Microsoft decided this was a business worth entering, the required capital to "replicate" the Netflix infrastructure is diminimus. Finally, this is a subscription business, yet none of the pom-pommers want to discuss the subscriber economics. Despite all the talk of streaming, churn remains around four percent per month, with per-subscriber free cash flow declining to less than $1 per month. This stock's chart will resemble that of the dial-up internet companies and the all-you-can-eat cell phone stocks on the back-side of the mountain. Simply ludicrous valuation for a lousy business model.
Blockbuster generated $470mm in rental revenues during the quarter just ended; Despite the suggestion, Netflix has not "put them out of business". Secondly, cumulative capex for NFLX during the past ten years is $260mm, so if a Microsoft decided this was a business worth entering, the required capital to "replicate" the Netflix infrastructure is diminimus. Finally, this is a subscription business, yet none of the pom-pommers want to discuss the subscriber economics. Despite all the talk of streaming, churn remains around four percent per month, with per-subscriber free cash flow declining to less than $1 per month. This stock's chart will resemble that of the dial-up internet companies and the all-you-can-eat cell phone stocks on the back-side of the mountain. Simply ludicrous valuation for a lousy business model.
People buy this stock simply because they've heard of it. They buy it because everyone's talking about it at the water cooler and the cocktail party.
Just like real estate was 5 years ago.
The best gains are made in assets that are, for one reason or another, underappreciated and undervalued.
I don't know why you'd want to join the herd when, if you're on ZH, you know damn well how dumb the herd is.
Netflix is a "you get what you pay for" type of service.
I would NEVER buy this stock at this point.
Streaming video from Netflix is a joke, as is the NEW plan.
$8.00 a month to watch OLD movies , series, to say, year 3-4-5, and then your left hanging, and have to rent to finish out the series.(I called them raising cain about WHY the movies available to stream are old crap,for the most part, and the selection is severely limited),after a long explanation, it's just a way to raise rates and make you keep the disc service & a price increase.
Their raising the price Jan 1st, to $24.00 for the 3 disc plan.
Plus Independent walk in stores get NEW releases at least 30 days or more before Netflix.
Look for ALL premium movies to be PPV only soon.
Dish makes you pay for 20yr old flics.Or you can watch Turner Classics and sit through a 90 minute movie for 3 hours(after commercilas are included).
turner classic is commercial free during movies.
One movie a month at your local mega-theater, one popcorn/drink combo = your entire Netflix subscription cost per month. That's all I need to know. I figure the 50 inch TV and blu-ray player has been paid for long ago -- on the Netflix installment plan. I'm a very frugal person and I see Netflix as a replacement strategy, not an add-on to an otherwise unchanged life style.
On the competitve front how does a company sustain itself when cable cos. as of this qrt begin streaming the same HD content for free vs. NFLX charging $8 and its in SD? Further as of this qrt HULU & ZUDU began offering services via PS3 and have already started to take share.....(see traffic rank chart). Hulu launched HULU Plus formally in 3Q on PC. All of this yet sub growth according to analysts will continue to accelerate? Yeh free subs will accelerate and been the last 3 qrts not paying subs.........
http://www.alexa.com/siteinfo/vudu.com
http://www.alexa.com/siteinfo/hulu.com
Firstly the debate on bandwidth is BS. Cable cos chose their path of streaming to compete & retail subs rather than squashing demand via prices increases for bandwith. They can vey well raise prices now that they want subs to use streaming can they?
This guy Hastings is very bad thinking he is the next JOBS. He manipulates investors & media by spinning negatives into positives like his recent price cut. The company has been borrowing money to buy back stock then insiders dump 1/3rd of their holdings. He has hire actors to fool investors on his Canadaian launch. Cash flow has been DECLINING last 3 qrts. He has overstated the extent of streaming usage (after all if this is a streaming cos. why in the hell do they just now have a streamng only plan?....why the hell do they contribute 1% of AKAM total revenes if streaming is 20% of traffic?). They conduct EPS call Q&A via email. They are losing DVD share to CSTR as of last qrt. They failed to beat top and bottom line last 2 qrts spinning that they are investing in the biz ( and now spin it again for 4Q).
30% of the float still sold short.
Still has a ways to run before all bears are totally wiped out of this stock.
By the way, when is Eric King going to interview the senior management of NFLX?
No gold stock ever has acheived the feat of going from $20 to $180.
And no stock has been able to climb like this despite the worst recession in a genereation, out of control currency and commodity volatility, and endless debates about "inflation or deflation."
No wonder Karl Denninger is pulling his hair out. Instead of pounding out missives about "This can't go on!!", he could have bought this stock when the market turned in March 2009 and quietly scored a 10-bagger.
There is always a bull market somewhere, no matter how dire the perma-gloomers predictions are.
I always look forward to your posts since I know they will be laden with nonsense. You may be correct that no gold stock has ever gone from $20 to $180 but let us look at ANV which went from $1.50 to $29.00 in 2 years. Keep on attending those "IBD Level 2" conferences so they can fill your head with more notions of buy every 50 DMA pullback until S&P 3,200.
Tit for tat wasn't his point. When something is running, it's pretty obvious. No point trying to predict destruction when it's showing no signs of happening.
As an aside, it was notable in both the wave count, moving averaves, and divergent oscillators when the breakdown started in 2008.
Agreed yet holding him accountable on his call of no gold stock ever being a ten bagger...he likes to exaggerate claims yet for some reason he has the privilege of posting charts here...go figure.
Nevertheless, there is a limit to how much high-bandwidth content you can stream at once and even though current infrastructure has since vastly expanded this is essentially what destroyed Mark Cuban's Broadcast.com (which technically didn't broadcast) business model in the 90's.
If you throw a TV transmitter on top of a tall building, that's pretty much the extent of your distribution costs. If a million people tune in to watch your program it makes absolutely no difference than if only one person is watching. Contrariwise, each additional person who streams a Netflix movie is putting an additional and unique load on distribution infrastructure, causing the system (or it's bottle-necks) to be that much closer to full capacity and possibly crowding out other content as well.
Maybe physical infrastructure will always stay one step ahead of data demand for companies like Netflix and it's competitors but the sky (unlike with real broadcast) is definitely not the limit here.
cinemageddon is where it's at for me, tons of obscure
vintage european flicks and much more; no hollywood
blockbuster bs propaganda allowed!
http://cinemageddon.net
Look at a five year chart; in october 2009 NFLX was trading at $20. If you had come to me with this recommendation back then i would have been interested. Now, twelve months later someone wants to get out and sell to someone (sucker ?) else at the top.You'll have to do a lot more convincing to get me in there, if ever.
In at the bottom, out at the top (unless shorting).
What the above article doesn't show in the daily chart :weekly chart from same website stockcharts.com.
http://stockcharts.com/c-sc/sc?s=NFLX&p=W&b=5&g=0&i=t96560838406&r=1963
I'm looking at the NFLX weekly chart at it was selling for around $45, not $20 in Oct '09. Since that time its been consistently above its 40 week MA so its an obvious momentum stock like CMG.
Thank you for the correction, the year should be 2008, same month october.
though I state with the rest of my previous statement.
Pumped balloons are not the place i wish to be regardless of who is pumping.
http://www.zerohedge.com/article/your-one-stop-guide-frontrunning-monday...
I must challenge the notion that ". . . inevitably, content will only get more and more expensive".
I think that is a proFoundly unlikely situation. Technology means a given standard of production gets easier to hit. And copyright holders, strapped for cash in the worst depression in living memory, will be pressured to offer their wares at competitive prices.
I see no sign, or likelyhood, of sustained price rises in entertainment. Quite the contrary, I expect Netflix will have to repeal its new price structure before much longer.
the record companies blocked free downloads, and how much does a (cyber) album cost? Too much really. That industry by comparison, is pretty fragmented. The way these guys are going you would think they would be the media king in a few years, and that the Cable guys will be buying content from them, (the cable guys are more like the utility, they make money regardless of who owns the content)
media is my avocation. the more pressing issue is where is the future of content? the social networking technology has separated itself, there are attempts to form old ideas into brief (60 second movies, quasi trailers) and for writers to deal in mini novels. The trend is clearly moving away from content altogether, (although Wall Street is always buying up the last great idea.
if you like to consider these things, watch the film version of Fahrenheit 451, in which Julie Christie is involved in an interactive acting studio, while her husband is out burning books. Social networking has been the cusp of change, how does Netflxc interact with that? There is also a sizable group of people going off the grid. addtionally ask yourself what are they doing in China, since we seem to headed that way, both culturally, politically, economically.
If we end up like China the only networking gear I'll need is a tall tree and a short rope.
you don't understand how the studios work, then.
You either have the big titles that people want to see, or they don't use your service.
Perhaps.
Or the studios have over-estimated their waning leverage. They have spent a decade pissing on their customer.
Flipping off your paying customer does have a shelf life. Hollywood is phucked. They pretend better than anyone outside of the NY Fed.
Really. Who cares how studios work? When you deliver stillborn profit centers...
Who would ever pay for it!!!!!!!!!!!!!
FREE FREE FREE
www.xunlei.com
www.ppstream.com
i think Netflix is using, on average about 30% of the ENTIRE USA broadband internet infrastructure....ESSENTIALLY FOR FREE..
this bullshit will be stopped...short-sell this stock, its premised on a mere temporary anomaly in the way the Internet, and all its Fiber Optic/Routers/Servers..treated as a Public Good (thanks to Al Gore)....another blantant example of private gain/pubic-good liability...
Al Gore, you bastard. I tire of this "Public Good" crap. If it's not putting money in my pocket, what the hell good is it? Next thing you know, the fire department will stop operating on a "for profit" basis and start putting out fires for the "Public Good."
No wonder the whole country is going to hell.
Are you saying they have managed to get their ISP's to give them their gigabit uplinks for free?
Where did you find this information?
also... Bandwidth today is like disk space was 10 years ago. In time it will get cheaper and cheaper and faster and faster.
Netflix is not using 30% of the US Internet bandwidth. Think porn, spam, and malware. The entire Internet infrastructure is used by many people who pay for the connection.
I can completely understand people wanting to short Netflix but I will say that they provide a service that is quite nice for $13 a month (I get the blue rays so I think they're a buck more per month). Cable for me was at minimum $60 per month and many of the channels I never watched and the news CNN/FOX is bs and I can't watch it anymore.
People may laugh about this but ditching cable was a little liberating. The cable company in my area is a monopoly.
Looks like it's got a ways to run. Wave 3 of 5 in a primary uptrend. :)
WARNING! THAT IS A STRICT SPECULATION
For a big hit, buy slightly out of the money puts a few days before quarterly earnings release, every quarter for the next two years.
That's 8 times.
There are three outcomes each time.
If you were to invest $1k per time, chances are that:
The analysis of this stock and the fundumentals are irrelevant. It is the stock market volatility and the uncertainty that you are betting on.
See my previous prediction back in May 2010 that came true to the tee in July.
click below:
http://www.zerohedge.com/article/here-are-critical-creditliquidity-indicators-keep-watch-coming-week#comment-338683
These bets materialized in the July expirations and one of them paid 1,700% (Gross) the next day as reported by the market ticker. $1k paid close to $1MM
http://market-ticker.org/akcs-www?singlepost=2139522
Oracle,
I'm comfortable with the view that, barring acts of God, price movements are not random and follow a repeating pattern.
I'm not impressed with engineered option plays that overlook this simple fact. However, the skill of profitable speculation is not something everyone can master.
Impressive !
That can be a good strategy but that part of the market is just too efficient for something like that to work consistently. Besides, (not to knock OoK here) but in a situation like this you really want to know about all her bets that didn't pay off.
Oldest trick in the book: get a mailing list of 10,000 likely football enthusiasts. Mail 5k your prediction that Team A will win the big game and 5k predicting Team B the winner. When Team A/B actually wins you take the 5k people on your mailing list who received the money-making prediction and repeat the process. After a few weeks of football games you have a small list in your hands of people who have received your money making prediction for every game of the season, just before game time.
Now you call those people (who are ignorant of the bigger picture) and ask them to subscribe to your service in time for The Superbowl.
- - - - - That said, if my short the 2X short VIX ETF + short the 2X long VIX ETF paper trade from last week makes big money by the end of the year...you'll be sure to hear about it ;)
These are the only two predictions I have posted so far.
I am out of the market now for obvious reasons except when some opportunistic trade presents itself.
I made some crazy bets on BoA and lost and I made some crazy bets on GLD when it was smacked down which paid off handsomely. Never stayed in the market for more than 3-4 days.
Of course the GS bet in July, paid for college for both of my sons. Hopefully, netflix will pay for daughter's college. It does however, require patience and discipline.
BTW: I never asked for commissions. If these bets work, I don't need to ask for commissions
Shorting both short and long ETF's may work due to the decay in fees and expenses.
Well that's just about the best (if not the only) kind of trading you can hope to successfully pull off in this F-ed up equity market. Stay nimble.
"refudiated...totally.."
http://www.bloomberg.com/news/2010-06-29/banks-financing-mexico-s-drug-cartels-admitted-in-wells-fargo-s-u-s-deal.html
"refudiated...totally.."
"refudiated