Tag Archives: Netflix
Any investor in Netflix (NASDAQ:NFLX) knows the standard touch-points that are frequently hit on by analysts – lack of ratings info, a perceived over-spending on shows and the company’s long-standing quest to conquer the movie industry chief among them. When any news tied to any of those areas comes out, it is like catnip to the media.
Granted that’s the point.
Netflix is one of the rare companies that can subscribe to the “any coverage is good coverage” mantra as they just enjoy being in the conversation. As analysts have seen, it thrives off of speculation and conjecture because everyone knows it won’t comment so it just creates more and more buzz around the content.
Yet in the case of Bird Box, something new happened. The company DID respond and put out actual data on viewing, but more importantly, it then ELABORATED on that data giving investors a rare glimpse behind the curtain – which ultimately just created more questions. It is infuriating.
Though, it’s also brilliant.
Netflix has again managed to reveal “just” enough to spark a new conversation but not enough to reveal anything to give their rivals any type of edge. Or did they? That’s the question investors and analysts are scrambling to make sense of and overall it’s a fascinating situation.
First, as always, some background.
Netflix’s goal to be as dominant in film as it is in television is well-documented. The problem is largely two-fold. Part of it is the film industry is well aware of how the TV industry basically sold itself out of power and the other half is the company under-estimated the power of a shared experience like going to the movies.
However, over the last few years, Netflix has doubled down on their efforts by recruiting top tier talent like The Coen Brothers, Martin Scorsese, Alfonso Cuaron, Will Smith, Adam Sandler and most recently Sandra Bullock.
Bullock is one of the most beloved actresses of the modern era. Not only is she talented, but she’s gone through the fire and came out unscathed. She’s as versatile as she is intelligent. The feeling with former Universal executive turned Netflix film czar Scott Stuber was that audiences would flock to her films whatever the medium.
And he was right.
According to Netflix, her latest project Bird Box (which he brought over with him) was viewed by 45,037,125 subscribers – a new record for a Netflix movie over its first seven days. The problem is that not only is that number oddly specific, it is mind-boggling. If taken on the surface, that would mean roughly 1/3 of all Netflix subscribers watched the film.
Now some people have taken this to the extreme and tried to put a dollar value to it, which is even more absurd and investors should pay it no mind. The logic is that if you take that total and multiply it by the price of a movie ticket (roughly $ 9.16), then Bird Box would have made around $ 413 million at the box office.
To give you a comparison that’s Star Wars: The Force Awakens type money.
Again, that is ludicrous and even Netflix would never be so bold to infer that (though it has come close in past instances). Not only is it nowhere near an apples-to-apples comparison, but it also furthers the narrative and Netflix knows that so it has no reason to even attempt to set the record straight.
What was so unique this time, though, was many media outlets asked for more information and instead of the usual answer of some clever way of saying “no comment,” Netflix actually commented. The company specified the number came from the number of accounts that surpassed 70% of the runtime and clarified it counted every account once (so the number didn’t include any repeat viewings).
Here’s the rub – that’s where the info stopped and from there it’s down the same rabbit hole as before. Netflix once again successfully chummed the waters and then let the feeding frenzy ensue. By answering questions, it actually opened the door to more questions which is a practice investors in the industry in this area are very familiar with by this point.
Personally, my biggest question is why 70%? Wouldn’t you try to find a number like 75% which represents 3/4 of the film or even 50/51% to show that people watched at least half the movie? 70% just seems like an odd choice and it makes me wonder how precipitous the drop-off was at 75% that they wouldn’t use it? Or was it the opposite and too high of a number to be believable? Not that 45 million is believable either, but that’s expected when talking about Netflix which makes claims that they have no intention of backing up.
And that’s also the point.
We’ve reached a new world where companies don’t have to be held to the same standards as others and it creates a Wild West of sorts. Investors can enjoy the windfall now, but they also need to just be warned this is a dangerous game Netflix is playing in the long-run. They opened Pandora’s Box and right now it is benefiting them, but it is only a matter of time until it backfires.
The problem is one of these days Netflix is going to make a claim that it can’t walk back and it may have already done that here. It basically defined what the company counts as a “view”, and while it’s not anywhere near the full secret sauce, it’s an ingredient that won’t go unnoticed. In fact, the company has already taken steps to put safeguards in place as they have told media this info applies only to Bird Box and it “should not be taken as a metric for all Netflix content.”
How does that work?
No seriously, how does that work? Does that mean it counts views at 70% of run-time for movies, but not TV series? Or does that mean it counts views at whatever percent helps its case more? Again, because there’s no checks and balance, they don’t have to answer that question. Or any follow-ups.
Yet, what is unfortunately buried in this whole thing is that if you take the numbers out of this for a second, you’ll see a movie starring a talented actress and directed by a gifted female director (Emmy-winner Susanne Bier) was able to garner this type of positive response from the public. We should just take a second to recognize that as in this day and age it is sadly a rarity. These women deserve an immense amount of credit for the work they shepherded.
To be fair, it is also a statement to the industry by Netflix that it is willing to be a change-maker in that regard – but by not releasing verifiable numbers, it doesn’t do people like Bier a lot of good when making future deals. That’s also part of the reason why Crazy Rich Asians’ writer Kevin Kwan picked a traditional studio over Netflix when selling the film rights. He wanted to have something concrete he could show the industry as proof that American audiences will see a movie headlined entirely by Asian actors – but that’s a story for another day.
For now, yes it looks like it’s Netflix’s world now and we are just living in it, but investors shouldn’t drink the Kool-Aid without realizing there’s likely more to these stories that we don’t know and more we should know that can help better the industry.
The Hollywood Reporter’s Daniel Feinberg may have summed it up the best:
“I’m fairly sure Bird Box is a phenomenon of some sort, but without verifiable data or comparative data for context, a Netflix-affiliated Twitter feed coming down from on-high with suspiciously specific (and yet entirely vague) data is the epitome of nonsense.”
And by the way, phenomenon is a good way to describe it as this week Netflix again took to Twitter, but this time to ask its viewers NOT to partake in what has been dubbed the Bird Box challenge. Because the Internet is the Internet, social media users decided to see which everyday tasks they could accomplish while blindfolded (as the characters are for most of the film).
Hint, it did not go well.
Regardless, the fact remains the movie hit the mark for Netflix, and numbers aside, it did exactly what it was intended to do – start a conversation.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
(Reuters) – Netflix Inc will raise its investment in content across Europe and plans to spend about $ 1 billion on original productions this year, the Financial Times reported on Wednesday, citing people briefed on the plans.
The revised budget will be more than double that of last year, the report said.
Reporting by Sonam Rai in Bengaluru; Editing by Arun Koyyur
Trump Tax Plan’s Effect on Inflation and Interest Rates
As everyone now knows, President Trump got his corporate tax reduction bill passed in late December, lowering the tax rate on domestic business from 35% to 21%. Thus far, most investors and pundits have focused on how the lower corporate rate is a boon to big companies nationwide. Obviously, lower taxes should lead to higher profits, all else remaining equal. However, what has received a bit less attention is the effect that the tax plan will have on future interest rates and inflation. According to the Congressional Budget Office, the tax plan will add an additional $ 1.4 trillion (yes, that’s $ 14 followed by 11 zeros – or, if one prefers, 1,400 stacks of $ 1,000,000,000 each) to the federal debt over the next decade. Clearly, with the economy already strong and with debt levels already high, the tax bill should almost certainly result in higher levels of future inflation and, hence, higher future interest rates.
Indeed, it took only a month and a half after the tax plan’s passage for investors to feel the first jolts from higher inflation, as CNN reported on February 6th:
Be careful what you wish for.
Wall Street partied hard while President Trump pushed for huge business tax cuts that the economy didn’t really need. Tax cut euphoria carried the Dow a breathtaking 8,000 points to levels never seen before.
Now comes the hangover. Investors are remembering that giving lots of medicine to an already healthy economy can have side effects, namely inflation.
Those inflation fears are suddenly rocking Wall Street. They sent the Dow plummeting 1,800 points in just two trading days. The losses wiped out a quarter of the gains since Trump’s election.
For months, investors basically ignored the threat that the tax cuts might backfire, causing bond yields to spike and raising the likelihood that the Federal Reserve will have to raise interest rates faster to fight inflation.
“We have an infinite capacity for self-delusion as investors,” said Bruce McCain, chief investment strategist at Key Private Bank. “When we feel good, we don’t want to be bothered by reality.”
How Inflation Swindles the Equity Investor
So, what does all this mean for shareholders? Back in May 1977, Warren Buffett wrote an article for Fortune magazine (full article linked here) entitled “How Inflation Swindles the Equity Investor”. Given that we now appear to be heading into an era of higher inflation, it pays to take a look back at Buffett’s thoughts on the subject from nearly 41 years ago. How does Buffett describe the relationship between inflation and equities in the Fortune article? First, he refutes the previously accepted view that equities act as an effective hedge against inflation:
There is no mystery at all about the problems of bondholders in an era of inflation. When the value of the dollar deteriorates month after month, a security with income and principal payments denominated in those dollars isn’t going to be a big winner. You hardly need a Ph.D. in economics to figure that one out. It was long assumed that stocks were something else. For many years, the conventional wisdom insisted that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their value in real terms, let the politicians print money as they might. And why didn’t it turn out that way? The main reason, I believe, is that stocks, in economic substance, are really very similar to bonds. I know that this belief will seem eccentric to many investors. They will immediately observe that the return on a bond (the coupon) is fixed, while the return on an equity investment (the company’s earnings) can vary substantially from one year to another. True enough. But anyone who examines the aggregate returns that have been earned by companies during the postwar years will discover something extraordinary: the returns on equity have in fact not varied much at all.
Basically, Buffett takes the view that equities are disguised bonds that pay around 12% on par value (i.e., book value, or shareholders’ equity). Thus, stocks are hurt just as much as bonds when inflation rises because the price-to-book ratio (and, consequently, price-to-earnings and price-to-sales ratios) for stocks must necessarily decrease just as a bond’s price decreases in inflationary times. Conversely, the lower the relative level of inflation, the higher bond prices rise and the more P/B, P/E, and P/S multiples for stock expand (all other things being equal).
Buffett goes on to identify a key additional characteristic of low inflationary environments: they favor companies that reinvest their earnings (versus paying them out via dividends). Why? Because when stocks are trading at 3.4X book value, as they are today, every $ 1 of cash from operations that gets reinvested in said book value should translate into an incremental $ 3.40 in market value for the shareholder (versus worth just $ 1 when paid out as a dividend, or even less after payment of taxes thereon). Buffett explains further:
This characteristic of stocks – the reinvestment of part of the coupon – can be good or bad news, depending on the relative attractiveness of that 12%. The news was very good indeed in the 1950s and early 1960s. With bonds yielding only 3 or 4%, the right to reinvest automatically a portion of the equity coupon at 12% was of enormous value. Note that investors could not just invest their own money and get that 12% return. Stock prices in this period ranged far above book value, and investors were prevented by the premium prices they had to pay from directly extracting out of the underlying corporate universe whatever rate that universe was earning. You can’t pay far above par for a 12% bond and earn 12% for yourself.
But on their retained earnings, investors could earn 12%. In effect, earnings retention allowed investors to buy at book value part of an enterprise that, in the economic environment then existing, was worth a great deal more than book value.
It was a situation that left very little to be said for cash dividends and a lot to be said for earnings retention. Indeed, the more money that investors thought likely to be reinvested at the 12% rate, the more valuable they considered their reinvestment privilege, and the more they were willing to pay for it. In the early 1960s, investors eagerly paid top-scale prices for electric utilities situated in growth areas, knowing that these companies had the ability to re-invest very large proportions of their earnings. Utilities whose operating environment dictated a larger cash payout rated lower prices.
We note here that the 30-year Treasury bond yield has jumped up recently, appreciating about 45 bps over the past six months to the ~3.20% level (source):
Granted, we are not even remotely close today to the ~15% level of the early 1980s, however, for equity investors, we currently appear to be moving in the “wrong” direction, at least if one buys into Buffett’s thesis. Indeed, looking at the very long view, it appears that the ~35-year bond bull market may finally be ending (source):
Now, we know why investors have been in love with so-called “growth” companies (especially big tech companies) during the recent moderate growth, low interest rate, and low inflation environment. These tend not to pay dividends but rather reinvest all their cash flows into existing or new operating businesses. Consider Amazon (AMZN) for a moment. All operating cash flow is plowed back by Jeff Bezos either into the existing retail business or in newer businesses such as Amazon Web Services. Unfortunately, the higher interest rates rise, the lower the relative benefit of the reinvested dollar for shareholders, and the less attractive “growth” stocks look compared to stodgy dividend payers like AT&T (T) or General Motors (GM) (again, other things being equal).
Buffett notes that a “reversal” phenomenon took hold in the mid-to-late 1960s just after major institutional investors had stampeded into growth stocks at nosebleed valuations:
This heaven-on-earth situation [regarding the superiority of growth stocks in low interest rate environments] finally was “discovered” in the mid-1960s by many major investing institutions. But just as these financial elephants began trampling on one another in their rush to equities, we entered an era of accelerating inflation and higher interest rates. Quite logically, the marking-up process began to reverse itself. Rising interest rates ruthlessly reduced the value of all existing fixed-coupon investments. And as long-term corporate bond rates began moving up (eventually reaching the 10% area), both the equity return of 12% and the reinvestment “privilege” began to look different.
Are we on the precipice of a new downward revaluation of stocks, given looming inflation? Today, stocks trade around 3.4X book value, compared to 2.0X book value in 2009 and just 1X book value in 1980. Let’s take an extreme scenario where interest rates are rising significantly and investors are only willing to pay book value for the S&P 500 again, as they did at the conclusion of the last bond bear market. Obviously, a growth company that trades today at 10X book value pays no dividends and earns 15% return on equity has much more potential downside than a dividend payer trading at 1.5X book value also earning 15% return on equity, since, even if the former were to trade at a consistent 3X the market multiple of book value (as it does now), it would still lose 70% of its value in the adverse scenario (i.e., its valuation would be reduced from 10X book to 3X book). In comparison, the dividend payer now trading at 1.5X book value might trade down to 1X book in the adverse scenario, meaning it would only have 33% downside, or less than half that of the growth stock.
Wither Tech Stocks Post-Trump Tax Reform?
So, how do some recent market darlings trade versus book value? Below are 5-year price-to-book charts for Amazon, Tesla (TSLA), and Netflix (NFLX):
We find that Amazon trades at 26X, Tesla trades at 14X, and Netflix trades at 34X book, or an average for the three of about 25X book value. This represents a multiple of over 7X the overall market’s (already historically high) P/B ratio. Moreover, none of these companies pays a dividend, so they receive maximum credit from investors for the fact that all cash (including cash sourced from incremental debt) gets reinvested in the underlying business at book value. As interest rates have relentlessly fallen during the current 9-year bull market, investors have logically marked up the equity valuations of these three to higher and higher multiples of book value. If Buffett is correct, however, these will be the very companies whose valuations contract the most when inflation and interest rates rise, as should occur in an era of higher and higher government spending and deficits.
Moreover, the likes of Amazon, Tesla, and Netflix are also the type of companies helped the least by the Trump tax cuts. For one thing, they are either unprofitable or marginally profitable, so cutting their tax rate yields minimal to no gain for them in terms of immediate earnings and cash flow. Second, the value of any deferred tax assets on their balance sheets is lower, since going forward, the amount of taxes they will be able to offset with their DTAs will be lower under a 21% tax regime than a 35% tax regime (for example, Tesla had $ 2.4 billion in DTAs on its balance sheet as of the end of 2017). Finally, the current market valuation for all three companies is largely based on investors’ expectations of massive profits many years down the line (under typical sell-side analyst DCF analyses, near-term profits for these companies remains subdued to nonexistent and then explodes to the upside in the out years, similar to a hockey stick effect). Yet if the tax cuts lead to higher interest rates, the present value of these out-year profits will necessarily be less, as the discount factor applied to them will be higher. Thus, we find that the Trump tax cut has a triple negative effect on companies such as Amazon, Tesla, and Netflix.
Indeed, media outlets noted the initial negative tech investor reaction to the tax bill:
Of course, certain highly profitable large-cap tech players such as Apple (AAPL), Google (GOOG) (NASDAQ:GOOGL), and Microsoft (MSFT) should benefit from the Trump tax plan, as their cash taxes should decrease significantly going forward. In addition, they will be able to repatriate billions of overseas profits at favorable rates. Thus, not all tech companies should be put into the same boat.
The passage of the Trump tax plan looks to be a major negative for companies like Amazon, Tesla, and Netflix. Not only do they fail to benefit immediately from the lower corporate tax rate (since they generate minimal to no profits), the present value of their future profits is less if higher government deficits lead to higher long-term interest rates (a process which seems to be already well underway). Not only that, but if Warren Buffett’s analysis is to be believed, higher rates will necessarily cause price-to-book multiples to contract market-wide from the current (historically high) 3.4X level. As a group Amazon, Tesla, and Netflix trade at a massive 7X the overall market’s P/B ratio, indicating that the downside risk from such a contraction could be significant. To be sure, the valuation of any individual company depends on many variables, including the quality of management and products, revenue versus expense growth, market share dynamics, etc. However, the truly scary thing for Amazon, Tesla, and Netflix shareholders about the Trump tax bill is that the negative knock-on effects for these companies, as outlined in this article, are completely outside their and their company managements’ collective control.
Disclosure: I am/we are long GM, AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We are also short TSLA and NFLX.
Streaming Netflix on a smartphone isn’t a viable or sustainable option for many people. Data plans can cap you at a couple gigs or less, and getting in one more episode of Unbreakable Kimmy Schmidt just isn’t worth hiking up the price of your cellphone bill.
To help, Netflix announced a new feature Thursday allowing mobile users to more easily control and keep track of how much data is being used when they stream over a cellular network. You can choose between different stream quality settings that correspond to specific data-to-time ratios. Read more…
In what is perhaps a long time coming for VR enthusiasts who have expressed faith in Oculus CEO Palmer Luckey’s vision for mainstream consumer hardware, the Facebook-acquired brand is finally putting it all together. Today at the keynote for Oculus Connect 2 in Hollywood, Samsung VP of Mobile Peter Koo announced a $ 99 Gear VR headset that will make use of Oculus technology and be ready in time for holiday shopping. The hardware will be compatible with all of Samsung’s Gear products, including the Note 5, S6 Edge+, S6, S6 Edge. Koo said it will be available to ship on Black Friday. The Gear…
This story continues at The Next Web
For those who have been itching to stream the new season of TV from the comfort of your Gear VR, a Netflix VR app will be available today, with apps for Hulu and Vimeo as well as Twitch coming on soon.
“IT’S FOR GAMES” has been the oft-quoted cry of VR headset makers and gamers when talking about virtual reality, but the opportunity for movies is unquestionably huge. Today, Oculus VR released a Netflix app for the Gear VR (and eventually Oculus’ own headset.) And it makes watching Netflix in real life seem super lame.