The Fundamental Problems Facing Netflix Are Known
In fact, this blog has listed many of them here. As a business model, Netflix controls few, if any, of the inputs that would determine its success or failure. That is a big problemo, but this blog has already pointed them out, before the warnings made by the company. It could be said, if you were a fan of management, that Netflix filled a void that existed between suppliers of content (studios) and delivery mechanisms (cable, tv, etc). No need to rehash that here.
Wasn't the Loss of Subcribers a Material Fact?
The troubling thing at this point, and perhaps most damaging, is the fact that management has held onto its business model for too long, without selling itself, and without putting itself in the monopolist position. Perhaps it could never put itself in the monopolist position in the US because the studios and the cable systems would never allow it. Fair enough.
However, given that the stock price was predicated on the growth of subscribers, and that Netflix would have had knowledge of the loss of subscribers, the fact that they have revealed this just now, without more clarity during the quarter is shocking, and will subject Netflix' management to class action lawsuits by investors who will claim, perhaps rightfully so, that Netflix management was negligent by not reporting an obviously material fact. This will weigh on the upside potential should a potential bidder emerge.
Who Would Buy Netflix? Ignore the Rumors
Much like $RIMM, there will be some speculation regarding Netflix as a takeover play. Unfortunately, given the fact that most of the weakness are known, and that those weaknesses are turning into a negative growth rate, enormous (insurmountable) barriers exist to repel any potential bidders. Just who would buy Netflix and why? Apple or Amazon could potentially buy, but to what end? Both have substantial cloud presences. Both have superior relationships with suppliers of media content. Maybe, one or the other would buy Netflix' portfolio of existing contracts to obtain exclusivity. Pixar has just signed with Netflix, and that could potentially be a jewel. The foreign expansion plans are still in their infancy, so that is still a wait-and-see proposition. In short, we are back to salvage value here: the value of the existing contracts could be sold to whom? A consortium made up of competitors? Unlikely. A buyer of existing subscriber base, who can change loyalties with a single click? Unlikely. This is probably not new news to Netflix' management, which has flip-flopped over the past couple of months over these problems. Unfortunately, the problems cannot be solved without selling itself to the highest remaining bidder, who would now face anger from existing shareholders. Still a sell. Even here.
Monday, October 24, 2011
Tuesday, October 18, 2011
RIMM: Breakdowns, Rumors, and Valuation ($RIMM)
The S&P Has Ripped Higher
Confidence in the eurozone "solutions" has led to euro strength vis-a-vis the US dollar, and the result has been a furious S&P 500 rally. Technology has led the charge, particularly in anticipation of Apple's earnings tonight. Earnings have done their thing, i.e. outperforming by a little, with cautious outlooks. It wouldn't take a crystal ball to predict this, as long as you believe that eurozone governments will attempt to kick the can, and hard, down the road.
RIMM Is Getting Hit on All Sides
The news for RIMM couldn't really get much worse, for now. First, Apple's 4S seems to be an enormous success, with 4 million units sold over its opening weekend. Second, Blackberry service has been interrupted, which prompted management to both apologize publicly, and offer $100 of free applications to users as compensation. Third, Carl Icahn stated on CNBC that RIMM was "not on the radar," thereby defusing buyout hopes.
That Said, $RIMM Has Been Resilient
What is most interesting is that $RIMM the stock has not really gone down very much. Now, there can be no doubt that much of this is due to the fact that the market, as a whole, has rallied more than 10% from the intraday lows earlier this month. At this point, the resilience must be respected, since it is clear that long-term holders have not entirely thrown in the towel. That said, the fundamentals of the above paragraph continue to apply, and note that $RIMM was very careful to not offer cash, and the reason is simple: it is running out of cash, as evidenced by last quarter's earnings report.
Breakup Evaluation
Again, the ltz vortex repeats its long-term view: single digits are in order as a terminal stock price. Cash is now down to $1.5/share. Patent portfolio? Again, Apple views its main competition as Samsung, as the two are in a bitter, and growing, battle in pretty much every jurisdiction on the planet. Apple and Samsung are fighting each other simply because $RIMM is not a relevant competitor. The Blackberry system outage has damaged its last remaining asset: diehards have stuck with Blackberry due to network security and exclusivity. Those features, along with RIMM's existence itself, must now be questioned. So unless a technology buyer appears to fuse the patent portfolio with one of its own, there is almost no chance of a bid. Time is running out, and management either needs to be replaced, or a further decline will be in order.
Confidence in the eurozone "solutions" has led to euro strength vis-a-vis the US dollar, and the result has been a furious S&P 500 rally. Technology has led the charge, particularly in anticipation of Apple's earnings tonight. Earnings have done their thing, i.e. outperforming by a little, with cautious outlooks. It wouldn't take a crystal ball to predict this, as long as you believe that eurozone governments will attempt to kick the can, and hard, down the road.
RIMM Is Getting Hit on All Sides
The news for RIMM couldn't really get much worse, for now. First, Apple's 4S seems to be an enormous success, with 4 million units sold over its opening weekend. Second, Blackberry service has been interrupted, which prompted management to both apologize publicly, and offer $100 of free applications to users as compensation. Third, Carl Icahn stated on CNBC that RIMM was "not on the radar," thereby defusing buyout hopes.
That Said, $RIMM Has Been Resilient
What is most interesting is that $RIMM the stock has not really gone down very much. Now, there can be no doubt that much of this is due to the fact that the market, as a whole, has rallied more than 10% from the intraday lows earlier this month. At this point, the resilience must be respected, since it is clear that long-term holders have not entirely thrown in the towel. That said, the fundamentals of the above paragraph continue to apply, and note that $RIMM was very careful to not offer cash, and the reason is simple: it is running out of cash, as evidenced by last quarter's earnings report.
Breakup Evaluation
Again, the ltz vortex repeats its long-term view: single digits are in order as a terminal stock price. Cash is now down to $1.5/share. Patent portfolio? Again, Apple views its main competition as Samsung, as the two are in a bitter, and growing, battle in pretty much every jurisdiction on the planet. Apple and Samsung are fighting each other simply because $RIMM is not a relevant competitor. The Blackberry system outage has damaged its last remaining asset: diehards have stuck with Blackberry due to network security and exclusivity. Those features, along with RIMM's existence itself, must now be questioned. So unless a technology buyer appears to fuse the patent portfolio with one of its own, there is almost no chance of a bid. Time is running out, and management either needs to be replaced, or a further decline will be in order.
Monday, October 10, 2011
Netflix ($NFLX) Dumps Qwikster Very Qwickly
Netflix Changes Course, and More Questions Get Raised
When Netflix ($NFLX) announced a split between its video streaming and DVD/Video Game delivery services, this blog suggested that it was the right, albeit unpopular, move. Today, when Netflix announced that it had changed course, and ended the idea before it got launched, the stock rocketed in pre-market trading to $128.5/share. However, the afternoon saw a dramatic turnaround, and the stock hit a low of $107.31 before recovering to above $111 a share.
Now, The Questions
The question is why the change of course. There could be three potential scenarios that this post will address.
a. Netflix is listening to its customers. This is what Netflix' management has said in public. This is what management would like you to believe. This is most likely true, in part. The company was pilloried in the press, and on its blog, with complaints. However, the problem with that is that there are now two other scenarios.
b. Netflix has seen a massive bailing out by customers. It is more likely, although unconfirmed, that Netflix has seen a huge outflow of customers. Given the negative attention resulting from the loss of Starz, and the upcoming Kindle Fire (with accompanying Amazon Prime video streaming service), management probably had to stem the tide. That cannot be good.
c. Netflix may have given up its only real hope for survival. This is most troubling. The way forward, perhaps the only way forward, over time, is to partner with either a consortium of studios, or a consortium of cable companies (unlikely). Netflix controls absolutely none of the main sources of entertainment. It is entirely subject to agreements with studios, etc, which control the creative process. By re-combining the DVD delivery service with the streaming service, it has lost the only way for it to sell itself, or to permanently combine with sources of distribution. Streaming service itself can be a viable business model. In countries with acceptable download speed, there is IPTV, which streams live TV, and video on demand, and doesn't use the traditional cable companies. Could that occur in the U.S.? Well, Time Warner, Cablevision, Direct TV, etc charge an enormous amount of money to its customers. An alternative would be welcome. Unfortunately, recombining DVD delivery with streaming effectively ends a clean path of exit or M&A for Netflix.
Finally: you know the company is in trouble, when Saturday Night Live does a parody, which can be seen here.
Disclosure: The writer has no position in Netflix, but has entered into daytrades, with the opening position as short.
When Netflix ($NFLX) announced a split between its video streaming and DVD/Video Game delivery services, this blog suggested that it was the right, albeit unpopular, move. Today, when Netflix announced that it had changed course, and ended the idea before it got launched, the stock rocketed in pre-market trading to $128.5/share. However, the afternoon saw a dramatic turnaround, and the stock hit a low of $107.31 before recovering to above $111 a share.
Now, The Questions
The question is why the change of course. There could be three potential scenarios that this post will address.
a. Netflix is listening to its customers. This is what Netflix' management has said in public. This is what management would like you to believe. This is most likely true, in part. The company was pilloried in the press, and on its blog, with complaints. However, the problem with that is that there are now two other scenarios.
b. Netflix has seen a massive bailing out by customers. It is more likely, although unconfirmed, that Netflix has seen a huge outflow of customers. Given the negative attention resulting from the loss of Starz, and the upcoming Kindle Fire (with accompanying Amazon Prime video streaming service), management probably had to stem the tide. That cannot be good.
c. Netflix may have given up its only real hope for survival. This is most troubling. The way forward, perhaps the only way forward, over time, is to partner with either a consortium of studios, or a consortium of cable companies (unlikely). Netflix controls absolutely none of the main sources of entertainment. It is entirely subject to agreements with studios, etc, which control the creative process. By re-combining the DVD delivery service with the streaming service, it has lost the only way for it to sell itself, or to permanently combine with sources of distribution. Streaming service itself can be a viable business model. In countries with acceptable download speed, there is IPTV, which streams live TV, and video on demand, and doesn't use the traditional cable companies. Could that occur in the U.S.? Well, Time Warner, Cablevision, Direct TV, etc charge an enormous amount of money to its customers. An alternative would be welcome. Unfortunately, recombining DVD delivery with streaming effectively ends a clean path of exit or M&A for Netflix.
Finally: you know the company is in trouble, when Saturday Night Live does a parody, which can be seen here.
Disclosure: The writer has no position in Netflix, but has entered into daytrades, with the opening position as short.
Thursday, October 6, 2011
Morgan Stanley: For Whom The Bell Doesn't Toll
The Annoying Thing About Goldman Sachs
The Vampire Squid has, on multiple occasions, stood on the stand, under oath, and proclaimed that their net exposure to AIG was negligible at the time that the housing market collapsed, FNMA and FHLMC took enormous bailouts, and Bear Stearns&Lehman failed. That, of course, was wrong at best, and a lie at worst. Why? The very parties that Goldman bought hedges from would have, in no small part, defaulted at the very time that they tried to enforce these hedges. Let's say that Goldman Sachs bought a CDS from Bank X to protect itself from AIG. If AIG were allowed to fail, then Bank X would have most probably failed. Goldman, in that case, would not have a chance to monetize its hedge on AIG. So for Goldman to claim, under oath, that it was "hedged" in the AIG case is wrong, wrong, wrong.
Why Morgan Stanley Isn't Goldman Sachs
Despite the Goldman "complex," Morgan Stanley isn't really in the same position that Goldman Sachs was during the financial crisis. The big noise being made is that Morgan Stanley has a great deal of exposure to French banks, which, in turn, have a great deal of exposure to Greece. Morgan Stanley has, not very successfully, stated that its net exposure is small. In other words, Morgan Stanley has used the same logic that Goldman did years ago. The difference? French banks are, although very important, not as pervasive and unknown as the mortgage-backed securities markets. The leverage factor is known. Of course, it is more complicated than that. If Morgan Stanley's hedges are bought from other counterparties that also dependent upon the solvency of French banks, then the same fallacy of the Goldman Sachs' logic above would apply in this case. However, this is most likely not the case, and the "net exposure" logic holds up much better than it did years ago.
Conclusion
None of this means that Morgan Stanley couldn't trade lower. Of course, owners of $MS, including employees, know that MS stock has been an unmitigated disaster. It didn't participate in the liquidity-induced meltup of 2008-2011, and has taken the full downside of 2011. So it is difficult to unilaterally state that Morgan Stanley stock is "cheap." However, the logic of French bank exposure to be the dominant cause? Nah. It is merely the easiest whipping boy of the financial shorts.
The Vampire Squid has, on multiple occasions, stood on the stand, under oath, and proclaimed that their net exposure to AIG was negligible at the time that the housing market collapsed, FNMA and FHLMC took enormous bailouts, and Bear Stearns&Lehman failed. That, of course, was wrong at best, and a lie at worst. Why? The very parties that Goldman bought hedges from would have, in no small part, defaulted at the very time that they tried to enforce these hedges. Let's say that Goldman Sachs bought a CDS from Bank X to protect itself from AIG. If AIG were allowed to fail, then Bank X would have most probably failed. Goldman, in that case, would not have a chance to monetize its hedge on AIG. So for Goldman to claim, under oath, that it was "hedged" in the AIG case is wrong, wrong, wrong.
Why Morgan Stanley Isn't Goldman Sachs
Despite the Goldman "complex," Morgan Stanley isn't really in the same position that Goldman Sachs was during the financial crisis. The big noise being made is that Morgan Stanley has a great deal of exposure to French banks, which, in turn, have a great deal of exposure to Greece. Morgan Stanley has, not very successfully, stated that its net exposure is small. In other words, Morgan Stanley has used the same logic that Goldman did years ago. The difference? French banks are, although very important, not as pervasive and unknown as the mortgage-backed securities markets. The leverage factor is known. Of course, it is more complicated than that. If Morgan Stanley's hedges are bought from other counterparties that also dependent upon the solvency of French banks, then the same fallacy of the Goldman Sachs' logic above would apply in this case. However, this is most likely not the case, and the "net exposure" logic holds up much better than it did years ago.
Conclusion
None of this means that Morgan Stanley couldn't trade lower. Of course, owners of $MS, including employees, know that MS stock has been an unmitigated disaster. It didn't participate in the liquidity-induced meltup of 2008-2011, and has taken the full downside of 2011. So it is difficult to unilaterally state that Morgan Stanley stock is "cheap." However, the logic of French bank exposure to be the dominant cause? Nah. It is merely the easiest whipping boy of the financial shorts.
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