Margin of Safety » NFLX

So, You Think You Can Be a Great Short Seller

Ray Galkowski, CFA — Tue, 25 Oct 2011 19:03:18 +0000

I am about to cover the final leg of my NFLX short, which I had in place for over one year. Are you one of the many who saw this coming? Did you expect a 75% drop in price since the peak on July 13, 2010? Many today say they did. For example, the tone on CNBC this morning? “It was inevitable.”

Really? See what CNBC’s Cramer said at the end of September, long after NFLX peaked in July:

http://www.youtube.com/watch?v=aTOXlWi96Gw&feature=player_detailpage#t=2s.

Most of the people who today are saying that they expected this are lying…to themselves. They are not trying to pull the wool over your eyes; they have pulled the wool over their own. They extrapolated out for several more years the rise from $50 in January 2010 to $304 on July 2011. They envisioned what they would do with the proceeds of a sale in 2015 of their 100 or 1,000 shares when the price of NFLX reached $7,000. So, paying six times sales in July was as natural as breathing.

If you think it is easy being short a company like NFLX, then were you? An analyst as thorough as there is and an experienced short seller—Whitney Tilson—could not hack it. It seems he could not stand the day-after-day upward momentum in this stock, often in large chunks, and he covered his short earlier this year just a few months after writing an excellent piece on why NFLX was a great short.

I am beginning to firmly believe that contrarianism is something that one is born with or seriously conditioned for at a young age. To be a good short seller, one has to have contrarianism in their DNA or their brain needs to be wired a certain way early in life.

I have attached a chart of NFLX’s price movement. The numbers are staggering to me, it had a momentum all its own. If you were not short in this period but today believe the 75% drop was inevitable, try to imagine what it was like at the various inflection points in this chart before July 13, 2011.

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Whitney Tilson Had a Bad Month and is Having a Bad Year

Ray Galkowski, CFA — Fri, 02 Sep 2011 00:48:21 +0000

I am somewhat surprised by this because I thought he was less than 50% net long. (Correction: Tilson made changes to the fund in August which resulted in the fund being 70% net long). Covering his NFLX short may have hurt a little (especially after today’s after-hours news) but a 70% net long position should have outperformed the market. I am also a little suprised by his comment about placing weight on future value over the present. I don’t think Graham would have viewed valuations quite the same way:

Our fund declined 13.7% in August vs. -5.4% for the S&P 500, -4.0% for the Dow and (minus) 6.4% for the Nasdaq. Year to date, it’s down 22.1% vs. -1.8% for the S&P 500, +2.1% for the Dow and -2.2% for the Nasdaq.

On the long side, our portfolio got clobbered across the board despite generally good company-specific news regarding our major holdings (discussed below). Amidst a tumultuous month in the markets, investors dumped stocks that were even slightly illiquid, or that are valued primarily on future, rather than current, profits – both traits that characterize many positions in our fund.

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NFLX News You Can Use

Ray Galkowski, CFA — Thu, 01 Sep 2011 22:15:53 +0000

Netflix, Starz contract talks fail

Date: Thursday, September 1, 2011, 2:46pm PDT

http://www.bizjournals.com/sanjose/news/2011/09/01/netflix-starz-contract-talks-fails.html?s=print

Diana Samuels

Reporter – Silicon Valley / San Jose Business Journal

Netflix Inc. and Starz Entertainment have failed to reach an agreement in their contract talks, Starz announced Thursday afternoon, and users will no longer have access to streaming Starz movies starting in March.

“This decision is a result of our strategy to protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content,” Starz CEO Chris Albrecht said in a statement Thursday.

Starz has distribution rights for both the Walt Disney Co. and Sony Pictures, according to Reuters, and offered some of the newest and most popular streaming movies on Netflix (NASDAQ:NFLX). Their contract is set to end Feb. 28, 2012.

“WIth our current studio rights and growing original programming presence, the network is in an excellent position to evaluate new opportunities and expand its overall business,” Albrecht said.

Los Gatos-based Netflix did not immediately post a statement on its website Thursday.

Netflix’s shares fell almost 11 percent to $208 in after-hours trading, according to Reuters.

Diana Samuels can be reached at 408.299.1835 or dsamuels@bizjournals.com.

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NFLX Getting “Hammered” After Hours; Is this the Walk of Shame?

Ray Galkowski, CFA — Mon, 25 Jul 2011 21:25:00 +0000

We doubt that missing revenue forecasts by less than 1% is legitimate reason for hammering a stock, especially when its earnings beat by a fair amount. No, it looks more like the morning after an NFLX investor party. At the height of the party, it seemed as if the good times would go on forever, but now the alcohol has been metabolized and NFLX investors are figuring out how to sneak away quietly while their friend is still sleeping. A generation younger than mine calls it the “walk of shame.”

However, don’t put it past these investors to try to throw another NFLX party tomorrow. It is only a matter of time before the partying must stop.

http://blogs.wsj.com/marketbeat/2011/07/25/netflix-hammered-after-revenue-miss/?mod=yahoo_hs

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What are NFLX’s Insiders Doing?

Ray Galkowski, CFA — Wed, 08 Jun 2011 20:15:55 +0000

The sentence below was taken from a Thomson-Reuters report of a sale by another Netflix insider (the General Counsel) who has little skin left in the game.

During the past two years, Netflix Inc. insiders have made 110 sales totaling 1,246,976 shares for $161,146,649.

Netflix insiders were content to sell their shares for an average price of $129.23. The stock last traded for more than twice that at $262.26. What do the insiders know that we do not?

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Interesting NFLX Comments at D9

Ray Galkowski, CFA — Thu, 02 Jun 2011 17:21:49 +0000

Today, Bob Iger:

Disney CEO Bob Iger said today at D9 to expect a new Disney.com content site within a year.

This “uber network” for the Walt Disney Company will be a home “for people to consume our content directly,” Iger said.

The site will have gaming and streaming video content, and will be monetized by a subscription service, advertising, pay-per-view, and even micropayments, according to Iger. (To be sure, he didn’t say that all this would be live within 12 months, but rather “elements of the relaunch.”)

…Iger said of sites like Netflix and Hulu, “The more distributors the merrier–it keeps them all honest.”

…Of Netflix specifically, Iger said, “I’m not in the camp that believes Netflix is going to own the world. I don’t think that’s possible in today’s world.”

Yesterday, Reed Hastings:

Netflix CEO Reed Hastings won’t say exactly how much it’s going to cost his company to renew its 2008 licensing deal with the Starz cable network. Speaking with AllThingsD’s Kara Swisher, he declined to say much about the state of negotiations between the companies. Asked to confirm the speculation of analysts that it might cost as much as $200 million, he said, “We
haven’t done the deal yet, but that wouldn’t be shocking.” At $200 a million a year, that would amount to a little more than 6 percent of Netflix’s forecast 2011 revenue. The original deal cost $30 million.

Is there any wonder why Hastings is selling his stock faster than he can exercise his options? Starz is just one small content provider. Other content providers will follow suit and charge NFLX more too…that is, of course, if the content providers have not signed exclusive deals with Disney, Amazon.com, Apple, Hulu, etc., etc. for content distribution.

We are still short NFLX.

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