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Whitney Tilson Explains Why He Went Long Netflix, Says He "Hasn't Lost His Mind", Cites Business Insider To "Defend" Thesis

Tyler Durden's picture




 

And now the "letter" we have all been waiting for...

From T2 Partners

Dear Partner,
 
We established a position in Netflix yesterday after the stock crashed 35%.  We will discuss it at greater length in our monthly letter next week, but in case you read about it before then, we wanted to assure you that we haven’t lost our minds.  We simply think it’s a good company and that the market has over-reacted to all of the recent negative news, thereby providing us the chance to own it at a cheap price.
 
Given our unsuccessful timing of being short this stock – a highly frustrating experience – we’ll admit that it was hard to overcome the emotional baggage and think about Netflix with a fresh perspective, but as we wrote to you in last month’s letter, for every investment decision, we simply ask ourselves: if we were starting our fund from scratch today and held only cash, what would we do?  In this case, the answer is that, at this price, we’d own Netflix.
 
Netflix today reminds us of BP 16 months ago (and we all know how well that worked out): the company, its CEO and the stock are all universally hated right now, with endless headlines of furious customers and shareholders.  We love situations like this – as long as we’re convinced that there’s a good company and a cheap stock once you cut through all of the noise.
 
And we do think Netflix is a good company – even when we were short it.  The problem wasn’t the company, but rather the extreme valuation of the stock – but now that it’s down nearly 75% from its peak less than four months ago, the valuation is downright cheap in our opinion. 
 
The article below captures many of the reasons we’re bullish.  In addition, we’d add the following:
 
•        We think Netflix can earn $5-6 of contribution margin per customer per month (a bit less than half of average revenue of approximately $12.50).  This translates into $1.3-$1.7 billion of operating profit (excluding Netflix’s nascent international operations), for a company with a market cap today of just over $4 billion.
•        With 23.8 million subscribers (again, excluding 1.5 million international ones), Netflix is being valued at $175/subscriber, a very low figure relative to other media companies.
•        We think Netflix was smart to raise its price – our only quarrel is how Reed Hastings communicated it.  We wish he’d send the letter below to them, explaining the reasons for this action.  Note that the price increase only affected subscribers who were getting both the streaming and DVD services (they were paying $9.99 and now have to pay $7.99 for each service, a 60% price increase).  Streaming-only and DVD-only customers didn’t see a price hike and these subscriber numbers are growing quickly, especially the streaming-only, which is the future of the company.  Based on the company’s guidance and our own estimates, we think that the number of streaming-only customers will rise 29% from 9.9 million at the end of Q3 to 12.8 million at the end of Q4, due to both new subscribers as well as current streaming and DVD customers dropping the DVD portion.  The net result is that the total number of subscribers will remain roughly flat in Q4, but the mix will shift to more streaming and fewer DVD customers (who will be far more profitable, thanks to the price hike).  We think these trends bode well for the company over time.
•        Its shrunken market cap means that Netflix would be a bite-sized acquisition for any number of much larger companies like Apple ($370B market cap), Google ($188B), Amazon ($93B) or Disney ($64B).
 
Please let us know if you have any questions.
 
Sincerely yours,
 
Whitney and Glenn
 
PS—Our fund is up 7.8% this month through yesterday.

----------------------

What we wish Reed Hastings would write to his subscribers:

 

We cannot deliver a superior streaming and DVD-by-mail service to our customers for $7.99/month, so we cannot rescind the recent price increase.  Allow me to explain why.  For many years, we had only the DVD-by-mail service and made a reasonable profit charging $9.99/month (for our basic plan).  We knew, however, that the future lay in streaming: it’s obviously far better to click a few buttons and watch a movie immediately rather than have to wait for it to come in the mail (and then have to mail it back). 

But streaming developed slowly thanks to technological barriers (which thankfully are falling rapidly) and the difficulty of licensing content (which remains difficult and expensive).  In the early days of our streaming service, it wasn’t a great product: few of our customers had the internet bandwidth to download movies quickly and in high definition, and our content library was very limited.  Thus, we gave it away to all of our subscribers.

This worked beautifully for a number of years: millions of our existing subscribers began using streaming and millions more signed up for Netflix to access our convenient streaming library of over 15,000 titles.  But the overwhelming popularity of our streaming service created a dilemma: our subscribers wanted more and more streaming content, but unlike DVDs, where we can simply buy a DVD and send it again and again to our customers, with streaming the law requires that we negotiate licensing deals with the content owners.  Not surprisingly, seeing our millions of customers and understanding that streaming is the future, they began to demand higher and higher prices for their content.  We don’t begrudge them, but this dramatically increases our costs if we want to make available to our subscribers the most popular movies and TV shows.  Meanwhile, the costs to provide our DVD-by-mail service certainly weren’t going down.  Thus, we had no choice but to charge separately for our two services.

I think $7.99/month for unlimited streaming or unlimited DVD rentals is a bargain – we just can’t afford to provide both for that price.  I wish we could and hope you understand.

 


 

Tilson ends his letter using an article from none other than Business Insider to "defend" his thesis:

Sorry, But This Netflix Collapse Is Overdone, source

 

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Wed, 10/26/2011 - 11:58 | 1812853 FLUSA.com
FLUSA.com's picture

Denial...the first stage of death...

Wed, 10/26/2011 - 12:09 | 1812917 Jay Gould Esq.
Jay Gould Esq.'s picture

"Cites Business Insider." Akin to "Cites Laugh-In." 

Wed, 10/26/2011 - 12:47 | 1813079 redpill
redpill's picture

Here come the Red Dead Redemptions!

Wed, 10/26/2011 - 12:48 | 1813080 Robot Traders Mom
Robot Traders Mom's picture

Business Insider has to be lower on the totem pole than CNBC's website. Seriously.

While I'm at it, fuck them for bashing Ron Paul.

They're fucking amateurs, Dude.

Wed, 10/26/2011 - 13:40 | 1813287 TheFourthStooge-ing
TheFourthStooge-ing's picture

On a more personal note, I know that the recent swan dive by Netflix probably has your son on suicide watch. However, after his most recent stunt, I don't think you need to worry.

(For those who don't know, Robot Traders Mom's son attempted suicide by sitting in his mom's running car inside the garage with the garage doors closed. However, Robot Traders Mom drives a plug-in hybrid, which was plugged in at the time.)

 

Wed, 10/26/2011 - 14:25 | 1813553 Robot Traders Mom
Robot Traders Mom's picture

Thanks Shemp. I actually haven't seen him in awhile. I'm hoping he just got lost on the freeway.

Wed, 10/26/2011 - 14:42 | 1813660 Hephasteus
Hephasteus's picture

He's an oportunisic offender and well the low haing fruit is rotting right now.

Wed, 10/26/2011 - 14:21 | 1813530 gmj
gmj's picture

Business Insider often reports both sides of an issue with equal passion, but under separate clickbait headlines.  Then the haters from both sides pile on and accuse them of bias, etc.  This generates even more clicks, and life is wonderful.  They don't pretend to be deep.  They often provide links to in-depth articles, in case you really care about the issue.  I learn a lot at BI, and it's fun.  I don't have any problem with their style.  You just have to understand their game.

Wed, 10/26/2011 - 11:59 | 1812854 FOC 1183
FOC 1183's picture

can't make this shit up

Wed, 10/26/2011 - 12:27 | 1813000 JW n FL
JW n FL's picture

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Wed, 10/26/2011 - 11:59 | 1812856 bigwavedave
bigwavedave's picture

whiplash bitchez

Wed, 10/26/2011 - 11:59 | 1812857 dracos_ghost
dracos_ghost's picture

Gotta love Red Light/Green Light investment strategies.

Wed, 10/26/2011 - 12:13 | 1812932 Ted K
Ted K's picture

momo going up........ momo going down........

Wed, 10/26/2011 - 12:23 | 1812989 fonestar
fonestar's picture

Streaming media and "premium content" long-term price point is $0 IMHO. 

Wed, 10/26/2011 - 12:00 | 1812858 Hedgetard55
Hedgetard55's picture

Amazing to me that people will pay these fools money to handle their assets/money/investments.

Wed, 10/26/2011 - 12:01 | 1812860 tekhneek
tekhneek's picture

Blah blah blah.

He's just another contrarian indicator.

Opened fresh shorts.

Thanks Whitney for your succint research on the matter. I will be sure to short into oblivion every overbought, overvalued stock that you are long.

Wed, 10/26/2011 - 12:00 | 1812862 Archimedes
Archimedes's picture

Oh the criminal Henry Blogett wrote it. Well at least Joe "I am the dumbest f**king finance reporter in the world" Weisenthal did not pen it.

Wed, 10/26/2011 - 12:03 | 1812881 drink or die
drink or die's picture

How anyone can consider BI a legitimate source of news is beyond me.  It's more of a tabloid than anything else.

Wed, 10/26/2011 - 12:06 | 1812900 snakeboat
snakeboat's picture

Ditto. Saw the word Kardashian on there the other day.  Done.

Wed, 10/26/2011 - 12:49 | 1813084 oddjob
oddjob's picture

I think that was the September issue of Gigantic Asses.

Wed, 10/26/2011 - 13:32 | 1813244 Pool Shark
Pool Shark's picture

 

 

Gigantic Asses

Yep, that's an accurate description of BI...

Wed, 10/26/2011 - 12:00 | 1812864 ZippyBananaPants
ZippyBananaPants's picture

If we were all in cash, why would we want to mess with NFLX at all?

Wed, 10/26/2011 - 12:19 | 1812975 Azannoth
Azannoth's picture

If I was all cash I would be all in gold, but than again I am all in gold :)

Wed, 10/26/2011 - 12:00 | 1812865 AngryGerman
AngryGerman's picture

hilarious. throw money away. then ask for bailout.

Wed, 10/26/2011 - 12:00 | 1812866 ZippyBananaPants
ZippyBananaPants's picture

If we were all in cash, why would we want to mess with NFLX at all?

Wed, 10/26/2011 - 12:02 | 1812867 bob_dabolina
bob_dabolina's picture

Meanwhile you can get their product for FREE at 30-40 websites I can think of off the top of my head. 

As a matter of fact, I believe "Margin Call" was just released on Pirate Bay a few days ago.

Meanwhile Netflix has a shitty variety of movies...this model won't work. 

...and can't you get movies for a fucking dollar at redbox?

Wed, 10/26/2011 - 12:17 | 1812959 fuu
fuu's picture

yo ho ho momo no no

Wed, 10/26/2011 - 12:35 | 1813037 bob_dabolina
bob_dabolina's picture

oh no homo don't know

Wed, 10/26/2011 - 12:01 | 1812873 s2man
s2man's picture

"they began to demand higher and higher prices for their content."

Nice

Wed, 10/26/2011 - 12:01 | 1812874 ZippyBananaPants
ZippyBananaPants's picture

If we were in all cash, why would we want to mess with NFLX at all?

Wed, 10/26/2011 - 12:04 | 1812887 LongSoupLine
LongSoupLine's picture

well, well, well...Tilson's on CNBS as a "special guest" as I write.

Too predictable...massive damage control. (read: Bear CEO on just before crash)

Wed, 10/26/2011 - 12:06 | 1812896 jcaz
jcaz's picture

Nope, hasn't lost his mind- just making another shitty trade.

Gee- no clue about forward revenue, a flawed and opaque business plan, no margins, competion ramping up left and right, and a CEO that is hiding under his desk-   yeah, that's the recipe for a long-term winner......

His month to date performance record says it all- he's trying to catch a wave. 

Whitney- the newest mo-mo guy.

Wed, 10/26/2011 - 12:09 | 1812911 s2man
s2man's picture

I made a shitty trade like that, once.  Knee-jerk "its dropped so much I can't go wrong". Wrong. 

Maybe I could be a fund mgr.

Wed, 10/26/2011 - 12:16 | 1812952 tekhneek
tekhneek's picture

It's called "catching knives" and we've all done it. Most of us tend to do it with our own money though so there's actual consequences.

 

Wed, 10/26/2011 - 12:20 | 1812977 malikai
malikai's picture

Yep. Now where do I sign up for doing that with someone else's money?

Wed, 10/26/2011 - 12:46 | 1813043 ViewfromUnderth...
ViewfromUndertheBridge's picture

I leave a small part of my latest dumbest-trade on...more effective than going on TV denying it.

Wed, 10/26/2011 - 12:41 | 1813058 Hot Apple Pie
Hot Apple Pie's picture

Yeah, once you learn the hard way with your own cash you tend not to repeat the mistake. Oh, to be on Wall Street where I can risk other people's money and get a cut when it goes up and have to live off my meager six-figure bonus when it goes down.

Wed, 10/26/2011 - 12:06 | 1812899 AnarchoCapitalist
AnarchoCapitalist's picture

Why would Amazon want to acquire NFLX? Amazon already has a successful streaming business via Amazon Prime. This guy is desperate.

Wed, 10/26/2011 - 12:10 | 1812918 NotApplicable
NotApplicable's picture

Only to kill it, I'd reckon.

Wed, 10/26/2011 - 12:13 | 1812905 Hustler Elite
Hustler Elite's picture

Tilson should learn to manage his emotions better and not make rash decisions such as going long... right after a loss on his short.

This looks like a trading strategy based on technical indicators rather than a "value" based strategy as he proports to uphold.

As for his month to date performance, yeah he is up... in a month that the S&P is also up about 6% (Oct.)

Wed, 10/26/2011 - 12:09 | 1812909 I am a Man I am...
I am a Man I am Forty's picture

still more expensive than Apple with absolutely shitty guidance while Apple has great guidance and is selling iPhones hand over fist

Wed, 10/26/2011 - 12:15 | 1812947 Ted K
Ted K's picture

You're 40 damnit!!!!!!!!!!!!!!!!!!

Wed, 10/26/2011 - 12:16 | 1812954 I am a Man I am...
I am a Man I am Forty's picture

I'M A MAN I'M FORTY!!!

Wed, 10/26/2011 - 12:09 | 1812910 slaughterer
slaughterer's picture

If we get QE3, NFLX will go to $125, conservatively.  That's a 60% ROI.    

Wed, 10/26/2011 - 20:18 | 1814950 Vlad Tepid
Vlad Tepid's picture

And the whole time your ROI is being taken into negative value territory while the numbers stay positive because of the inflation QE causes in equities. Baaaaaaa-uy, Lamby-kins.

Wed, 10/26/2011 - 12:09 | 1812914 The Axe
The Axe's picture

i will wait for the secondary, which is sure to come...

Wed, 10/26/2011 - 12:14 | 1812940 jcaz
jcaz's picture

Yep, no doubt they're talking to investment bankers right now, gonna spin the secondary as "bridge capital necessary for the Global rollout".....  Whatever, dudes......

Personally, I still have my Netflix account, until something better and cheaper comes along....  I can only imagine the secondary will try to quantify my "loyalty" in some positive number, LOL!

Wed, 10/26/2011 - 12:09 | 1812919 Bam_Man
Bam_Man's picture

This is compulsive gambling behavior.

There are plenty of stocks out there that have crashed just as hard as NFLX and represent far better value. Take RIMM, HPQ and FSLR for example.

If you are an investor in Tilson's fund, the fact that he chose NFLX instead is absolutely scary.

Wed, 10/26/2011 - 12:16 | 1812934 bob_dabolina
bob_dabolina's picture

FSLR sucks. You know why FSLR sucks? Because solar sucks. 

If there was a market for that shit it wouldn't need all these government subsidies. 

It's just another stock to chase...like enron, worldcomm, tyco, etc. Not saying they are a fraud (fslr) but it's just another donkey to jump on. You know the drill, jump on a donkey and pretend it's a Ferrari

Wed, 10/26/2011 - 12:18 | 1812968 moldygoat
moldygoat's picture

Solar wont suck when GE starts producing it. They are just biding time untill they can buy all the tech at pennies on the dollar then wham......one presidential reach-around and solar is great. I think Immelt is a power bottom BTW.

Wed, 10/26/2011 - 12:25 | 1812992 Bam_Man
Bam_Man's picture

FSLR has a P/E of 8, a clean balance sheet and a tangible book value of $35 per share.

At less than $50 it is a very good "value" stock.

Wed, 10/26/2011 - 12:44 | 1813052 bob_dabolina
bob_dabolina's picture

It was trading at $200 just like a few months ago, it's in the $40s now.

It may be a good stock, but it's a good stock in a shitty industry. That's like being the smartest guy with chronic occular herpes. It's not gona' help you get laid. 

Wed, 10/26/2011 - 13:55 | 1813347 Bolweevil
Bolweevil's picture

Ow, just ow.

Wed, 10/26/2011 - 14:08 | 1813365 Libertarians fo...
Libertarians for Prosperity's picture

 

 

What difference does your opinion make if you're trading fake money, and your bad trades can be erased with a "reset" button?  Do you think anyone actually cares about your thoughts on any particular stock? Hell, even if you did have some skin in the game, no one would give two shits what you think.

 

 

Wed, 10/26/2011 - 13:10 | 1813153 oddjob
oddjob's picture

So the price of Oil is not subsidized in any way?......educate yourself.

Wed, 10/26/2011 - 13:11 | 1813157 bob_dabolina
bob_dabolina's picture

Who the fuck was talking about oil asshole? 

STFU

Wed, 10/26/2011 - 13:21 | 1813194 oddjob
oddjob's picture

If there was a market for that shit it wouldn't need all these government subsidies.

Just shoving your own stupid inept words right back at ya. So, when you take that cock out of your mouth, like I said educate yourself.

 

Wed, 10/26/2011 - 12:11 | 1812923 KandiRaverHipster
KandiRaverHipster's picture

buy low sell high seems apt

Wed, 10/26/2011 - 12:21 | 1812982 tekhneek
tekhneek's picture

He's taking BTFD way too seriously on this one.

It's BTFD, not BTFF (buy the fucking fail)

Wed, 10/26/2011 - 12:14 | 1812943 Strom
Strom's picture

Reminds me of when I went long Worldcom - "It can't be that bad", I thought...

Wed, 10/26/2011 - 12:18 | 1812967 Thucydides
Thucydides's picture

Tilson's sanity index.  On a scale of 0 to 10 where 10 is absoulutely lucid and 0 is stark-raving mad.  Tilson=? Tilson self-respect index on the same scale...my guess is -1 and -10 for each.

Wed, 10/26/2011 - 12:18 | 1812969 banksterhater
banksterhater's picture

BULLCRAP! He closed out his short too soon now he's trying to make back his LOSS, classic gambling mentality and he's a typical hedgefund slimeball, make these bastards pay ordinary tax rates!

Wed, 10/26/2011 - 12:29 | 1813010 equity_momo
equity_momo's picture

I love the ps.
Hey dickwad the Dow is up 9% through this month and your investors could have caught that just by being long an ETF at a FRACTION of your BS management fees. Without chasing MOMO. Good luck with your shitflix. Fkwit.

Wed, 10/26/2011 - 12:30 | 1813015 jmcadg
jmcadg's picture

Great way to piss away $1,195. Does that include food. It fuckin' better, because I'd stay at the buffet table if I had such money to burn.

Wed, 10/26/2011 - 12:32 | 1813016 Captain Benny
Captain Benny's picture

Tilson talked to Reed Hastings directly which is why he refused to answer the question on CNBC about 5 minutes ago... CNBC is helping perpetuate the round of frost-the-brownie circle jerk off.

Wed, 10/26/2011 - 12:47 | 1813076 jcaz
jcaz's picture

Yep, I can't comment on my conversation with Reed Hastings, either-  because like Whitney, I NEVER HAD ONE.

What a twat....

Wed, 10/26/2011 - 12:31 | 1813019 GrinandBearit
GrinandBearit's picture

Pure comedy.  

Dive, DIVE! 

I predict NFLX to hit $3.00/share by late December.

Wed, 10/26/2011 - 12:43 | 1813064 MoneyandPolitics
MoneyandPolitics's picture

His assumption is that contribution margin for streaming will go to 50% in the future when it's 7.7% right now and likely will trend lower next year. 

Wed, 10/26/2011 - 12:44 | 1813066 comrade rally monkey
comrade rally monkey's picture

ZH publishes- stock soars!!!

 

Can you comment on,on..on...CLF

 

 

Wed, 10/26/2011 - 12:49 | 1813085 HedgeFun
HedgeFun's picture

How do i cancel Whitney Tilson's letters from showing up on quality sites like ZH?

Wed, 10/26/2011 - 13:06 | 1813142 lunaticfringe
lunaticfringe's picture

catch a falling knife and put it in your pocket...save it for a rainy day

Wed, 10/26/2011 - 13:35 | 1813259 Bansters-in-my-...
Bansters-in-my- feces's picture

I read some of Buisness Insiders work recently.

It seemed like propaganda and bullshit mixed up in the same batch,and spead thickly.

Wed, 10/26/2011 - 14:51 | 1813724 Hephasteus
Hephasteus's picture

I remember 1982. This crazy channel called MTV used to "stream" videos to millions of tv's worldwide. The technical barriers were of course HUGE.  Then once they started pumping record sales they started getting into child pornography. But I digress.

Anyway cool story bro.

Wed, 10/26/2011 - 15:04 | 1813799 downtownshuter
downtownshuter's picture

Can't help but think that Apple will release a real TV product, then offer unlimited streaming on all iOS devices for $7.00/month through iTunes, then NFLX is worth 0.00

Wed, 10/26/2011 - 15:57 | 1814008 lechmm
lechmm's picture

I think this is a bold move on the part of T2 Partners. They may be able to recuperate a chunk of money they lost.

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