Monday, October 24, 2011

Netflix's "coming to jesus" moment arrives...

My last blogpost noted that Netflix was in a bubble (at $165/share) in September 2010. In after-hours trade, the stock is down to $85/share, for a nearly 50% haircut.

As you might recall, the main reason for citing Netflix as being in a bubble was based only partly on valuation and the rising costs to procure content. The real catalyst was the utter hubris displayed by Netflix CEO Reed Hastings who deferred to his core subscriber base as "self absorbed" and ill-informed of anything going on the world. This hubris was evident in Netflix attempting to raise prices 60% and split their services, as if they were selling an inelastic product (i.e- milk, gasoline, etc).

I will defer to my prior post on Netflix, but needless to say the massive increases in content-acquisition cost have not filtered into the amortization on the income statement (Nor have they gotten Starz to agree to content deal yet).

Summary- I would say this, at an $87 price, Netflix is trading at a $5bln Market cap (<2x sales and 12x EBITDA). The company has a base of subscribers that have greater monetization and loyalty than any of the stupid coupon/groupon/deal sites that seem to be tickling investment banker's fancy. As such, Netflix has greater "network value" that is inherently more stable then a flash-in-pan like Groupon (who is wholly reliant upon retailers offering 50% discounts to Groupon for free on an ongoing basis).

 IF Groupon managed to IPO at a ridiculous valuation of $10Bln, it would be an interesting long/short to buy Netflix/short Groupon. Otherwise, have no position (no current short position in stock, currently short Netflix streaming following service cancellation)

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