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Fools Rush In After Netflix CEO Boasts on Facebook?

EconMatters's picture




 

By EconMatters

The wild ride of Netflix (NFLX) shares continues. After plummeting from above $300 a share to around $60 all within the past year mostly due to poor management decision. Netflix shares spiked more than 21% in one week to close at $81.89, the highest level in two months, on Friday July 6.

Chart Source: Yahoo Finance, July 6, 2012

 

Netflix is not scheduled to report its full earnings for Q2 until after the market close on July 24. Rather, this latest renewed enthusiasm came primarily from an upbeat Facebook update by CEO Reed Hastings:

"Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we'll blow these records away."

 

The stock also got a bump after Citigroup reiterated a 'buy' rating on Netflix shares, calling the price "highly reasonable" with a target of $130 a share, about 56% from the current level. Judging from the price movement, the unexpected buying action most likely also resulted a massive short squeeze. (Hastings' Facebook page has almost 206,000 subscribers.) Nevertheless, Netflix shares are still down 26% in the last three months and off 72% in the past year.

Netflix has been beefing up its program offerings by acquiring exclusive content to stay competitive with rivals like Amazon (AMZN), Apple (AAPL), Hulu and Comcast (CMCSA). Bloomberg reports that Netflix said in January that viewing in Q4 of 2011 totaled just over 2 billion hours. So this new figure of one billion viewing hours in June alone does seem to suggest a faster growth rate for Netflix streaming service.

Nevertheless, since Netflix streaming service charges a flat fee per month, at least part of the increase in total hours could come from an increase of viewing hours per subscriber, which is actually bearish for the stock. So the one billion monthly streaming hours reflects more the content and marketing strength of Netflix, rather than a compelling story of the bottom line or growth in a very competitive market sector.

Fundamentally, a more troubling picture also emerges with a look at the company's balance sheet. For the quarter ending March 31, 2012, the company has $804.5 million in cash, but $1.45 billion in current liability, with a scant quick ratio of 0.6, and a current ratio of 1.4, barely above the minimum threshold of 1.

Then there is also this $3.7 billion off-balance liability buried deep in the company's 10Q filing. Based on a Bloomberg review, these off-balance liabilities are the minimum estimates (i.e., the actual could be a lot higher) for payments due for future contents already under contracts. Out of the $3.7 billion, $3.1 billion will come due within three years. Including this $3.7 billion, Netflix Debt-to-Capital would balloon to 618% from the current 60.3%!

From a valuation standpoint, since profit will likely get squeezed pretty hard with the company's ambitious international expansion plan, Netflix stock looks over-valued with a current forward P/E of 38.63. For comparison purpose, the same ratio for Nasdaq 100 is 13.78, 12.95 for S&P 500, and under 12 for both Apple and Google. I guess Netflix share price is only "highly reasonable," as described by Citigroup, if you compare it to the high flying stocks like Amazon, which has a forward P/E of 87.67.

 

Chart Source: Ycharts.com, July 6, 2012

 

For now, Netflix does appear to be the leader of the video-on-demand (VOD) pact primarily benefiting from the first mover advantage. However, competition is becoming fierce and cut-throat. It looks like cable companies are getting anxious to punish Netflix for its sins of free-riding on their expensive fiber optic network. For example, in a clear declaration of war against Netflix, Comcast recently announced its intention to offer a similar service as Netflix, albeit with a much weaker library, for $5 per month, and many free movies to its Xfinity subscribers. Amazon Prime offers streaming video in addition to expedited shipping for $79 annually. Not to mention sooner or later, tech giants like Apple and Google (GOOG) will start throwing cash around, and get more aggressive in this space as well.

Ultimately, "content is king" in this sector. So it is doubtful Netflix would keep getting exclusive contents, and maintain its lead in the long run, considering most of Netflix major rivals are equipped with much deeper pockets.

The self-congratulatory social media update from the CEO seems a bit pre-mature to suggest an entry into the stock. We maintain our recommendation to stay away from this stock, as there are more compelling stocks to invest in with either better growth, and/or value prospect.

For investors got in during the past week, instead of holding to Citigroup's bullish-biased $130 target, it'd better to gradually cash out, since the stock most likely will have higher volatility going into the earnings next month.

Further Reading: Amazon vs. Netflix: Let the Battle Begin

 

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Tue, 07/10/2012 - 01:58 | 2601229 Me_Myself_and_I
Me_Myself_and_I's picture

Citigroup recommends it?

 

Wow.

 

About time I got something back from Citi.  I guess those hundreds of billions in bailout money are finally paying off!

 

Gotta gets me a piece of the pie.

Tue, 10/30/2012 - 14:14 | 2932089 smartmil
smartmil's picture

A neti pot snoring is an effective solution of your problem if your nasal passages are blocked because of abovementioned afflictions. Of course, it can’t be considered a cure of the disease, but it is an effective way to improve your nasal congestion that will reduce your snoring.

Mon, 07/09/2012 - 21:47 | 2600797 SamuelMaverick
SamuelMaverick's picture

 It might be time to short this pig again !! The first two times I shorted NFLX were 5 baggers.

Mon, 07/09/2012 - 20:38 | 2600634 rsnoble
rsnoble's picture

Actually, regardless of what you think of NFLX, it was a strong chart to buy.  Long term support, consolidation, blast off. Happend all the time regardless of the POS company lol. Strong support not far off, if it can even make it there.  The only idiots are the ones still holding.

Mon, 07/09/2012 - 20:40 | 2600638 rsnoble
rsnoble's picture

I meant strong resistance not far off.  I still like the gap window in the $55 area lmao. I have no doubts it will get filled.

Mon, 07/09/2012 - 19:51 | 2600494 adr
adr's picture

Hi, my name is Reed Hastings and I just granted myself another 30k shares along with more shares for all my board buddies. Our earnings are going to suck, so I would like to cash out at a much higher price right now. Thank you for believing my bullshit and running my stock up 21% in a week. My pocket and the pockets of my friends thank you.

Kiss my rich ass,

Reed

Mon, 07/09/2012 - 19:04 | 2600327 Der Wille Zur Macht
Der Wille Zur Macht's picture

I watched precisely a BILLION more hours of NETFLIX shows last month than usual. Looks like the joke's on them!

Mon, 07/09/2012 - 18:42 | 2600283 Son of Loki
Son of Loki's picture

Netflix has fewer and fewer good films. Instead of invenotrying some classic domestic and international movies, they stock up on "Films for Dummies" like cheerleading stuff and films for teens and IQ's lower then 75. Unless their business model changes I don't see a future in that company.

Mon, 07/09/2012 - 21:21 | 2600730 monoloco
monoloco's picture

I don't know if that's more of an indictment of Netflix's business model or the average viewing public

Mon, 07/09/2012 - 20:36 | 2600622 Taint Boil
Taint Boil's picture

 

 

 

Sucker born every minute.

I got Netflix, but just for the kids - Never watched a movie yet, I would if they had something worth watching. Like you said  ... IQ lower than 75, yeah..... About right.

Pay $7.99 / month - any more I would cancel. Sponge Bob 24/7 in my house ..........

 

Mon, 07/09/2012 - 17:30 | 2600057 eatapeach
eatapeach's picture

For fuck's sake, Arrested Development is free for Amazon Prime members.

Mon, 07/09/2012 - 17:49 | 2600108 flattrader
flattrader's picture

For fuck's sake join one for more DVD Swap sites...same for CDs and paperbacks.

 

Mon, 07/09/2012 - 17:18 | 2599994 distopiandreamboy
distopiandreamboy's picture

About that increase in viewing hours:

1. Massive heat wave; people want to stay in their cool air conditioned homes watching their shows. Especially obese people.

2. Every kid, teenager and college student in the country is out of school with nothing to do and limited money.

Tue, 07/10/2012 - 06:13 | 2601383 Skateboarder
Skateboarder's picture

Add a few million recent grads with no job in sight, and voila, viewership spikes!

Mon, 07/09/2012 - 17:07 | 2599962 DaveyJones
DaveyJones's picture

should the banks start a page?

Mon, 07/09/2012 - 16:52 | 2599914 world_debt_slave
world_debt_slave's picture

Netflix, Facebook, does anything more need to be said?

Tue, 07/10/2012 - 06:12 | 2601381 Skateboarder
Skateboarder's picture

Maybe Groupon can be said too lol.

I don't understand how FB is still at the 32 range. In comparison Netflix offers, you know, a real service... however meh it is.

They have Agatha Christie's Poirot as the British TV series on Netflix. Shit is ace dawg.

Mon, 07/09/2012 - 16:48 | 2599910 Satan
Satan's picture

My name is Satan and I am addicted to kickass torrents.
It started with just a couple of downloads a month but soon spiraled out of control. I'm competing for bandwidth against my own children and my wife.I'm not proud. I've installed fibre optic broadband for greater download speeds.
Downloading pirated media is wrong .But its not like Im Ben Benanke or anything.

Mon, 07/09/2012 - 16:51 | 2599913 Moe Howard
Moe Howard's picture

Torrents are soooo yesteryear.

Mon, 07/09/2012 - 16:44 | 2599902 Moe Howard
Moe Howard's picture

Get a subscription to "Gold" and watch your money appreciate.

Tue, 07/10/2012 - 05:19 | 2601359 Hobie
Hobie's picture

Priceless!

Do NOT follow this link or you will be banned from the site!