Sunday, July 03, 2011

NETFLIX - Is a Short


It's time to analyze the position of Netflix NFLX in the broader market. This stock keeps advancing and it's red hot for portfolio managers. The revenue is solid $718,553,000 and the EBITDA looks good at $224,993,000 with a P/E ratio of 82.5. On June 3rd, I wrote that it's still too early to short this stock because it has too much momentum, but for those who've already made their money, it's time to start building an exit strategy. Why did I say this?
The FCC gave data service providers the ability to start charging customers based on their data usage. A user and data customer might have to really start thinking long and hard about watching that cute kittens youtube video if it's going to put them over their data plan. Though cable and internet service providers like Comcast haven't set forth in claiming these profits yet, they soon will, and streaming HD movies from content providers like Netflix through a Comcast hub will drive up the gigs used faster than almost any other use through the web. Depending on the allotted gigs or terabytes a cable company gives each customer, they may only be able to stream a handful of movies before added costs kick in. This will drive the consumer's cost up significantly when they look at their bill for Netflix in conjunction with the bill from Comcast. This was my thought back in March when AT&T was the first to launch a data cap of 125 gigs per month of data usage.
Comcast, like AT&T, Time Warner, RCN and other data/internet providers, already has a deal with content providers like HBO, Showtime, Encore etc... If you are part of the XFinity package you can stream videos on your computer as well as the television. There are no added costs to download or stream content in this manner so far. HBO also launched it's own application which allows your smartphone to manage and view content including movies and TV series. A customer can take all of those programs out of their Netflix queue right now. You can watch everything through the current season's episodes on your HDTV where as Netflix has dated content.
I was asked if I see Comcast making deals with studios to provide streaming content through their network, and before the NBC merger, I would have said no, but since I've considered the move as a foray into the field of content and an excellent acquisition of television news broadcasting services. I believe they'll continue to let their OnDemand services grow and as that option becomes more popular, they will modify their contracts with subscription channels like HBO and Showtime to a more advantageous position.
Finally, and most importantly, this year Netflix will hit the cap on the number of users who can access titles from various studios (like Disney, Sony, Columbia & Dreamworks). Their contracts stipulate that when Netflix subscribers list hit a certain number, the contract will be renegotiated and those titles will not be available until a new agreement is reached. An interruption in services for any prolonged period of time as a new contract is drawn up will send customers looking for alternatives. Netflix will be search to make up the lost revenue by increasing the cost for their customers. I'm not certain, but I believe they'll make consumers choose between two paths, either paying more, or limiting service. If they limit service to snail mail delivery, or charge extra for online streaming services. Either way, they will disenfranchise their customer base. I believe they will lose customers and their growth will be slowed.
I expect more downside pressure from this point (Update July 18, 2011). As the headlines change in an uncertain global economic market where a jobless recovery appears to become more of a reality, I believe you will eventually see the downgrade of Netflix. In a world controlled by ETFs and indexes, a buying opportunity will arise in corporations like Comcast which will be brought down in the ETFs along with Netflix.

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