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Dan: $NFLX – It’s Different this Time :)

By - - Equities on June 10, 2015 1:51 PM Follow-Ups DanInitial

Last night on CNBC’s Fast Money we discussed the merits of Netflix’s bounce in anticipation of a stock split. I think regular viewers of the show know where I stand on this sort of stuff, it’s almost entirely nonsense but often becomes a self fulfilling prophecy. The assumption is when a cult stock is split, small investors are more able to pile in. So traders anticipate that by buying the stock before the split, pushing the stock higher and “proving” the theory. If investors want to invent excuses to buy a stock, then have a ball. And they are today, with the stock up 5%.

But let’s talk about the stock itself. NFLX is one of those cult stocks with unbelievable volatility over the past few years and yes the phrase “it’s different this time” is commonly being used to explain the stock’s 100% gains in 2015 alone. NFLX sales are expected to hit $6.8 billion in 2015, a ten fold increase from a decade ago when the company registered $688 million in sales, on average sales have been growing about 30% since 2005. In 2014 the company reported their largest annual net income of $341 million on $5.5 billion in sales. Far more impressive than Amazon’s (AMZN) $732 million on $89 billion in sales. But I think it is safe to assume that 30% sales growth from here on out will be a challenge despite the opportunities for overseas expansion given what appears to be no shortage of competetion.

The stock makes no sense to me and I suspect it makes little sense to most investors aside from some of the largest mutual fund complexes on the planet, and a few very savvy hedge funds. The top 10 holders of NFLX own about 52% of the shares outstanding on what is a fairly low float of about 60 million shares.

From Bloomberg

From Bloomberg

With 7% of the float short and such concentrated ownership, I think it is safe to say that the fix has been in.

No doubt about, NFLX is a special stock at the moment. And a quick look at the stock over the last five years shows a special volatility. If you bought stock at the 2012 lows you would have been rewarded with 1100% gains. But you would have had to somehow manage to hold onto your stock through two 35% declines while you waited for an epic breakout in April above $500. Easier said than done. But now look at it:

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But are NFLX investors willing to stomach that sort of volatility going forward? I am not trying to ring a bell, or sound an alarm here, and to be frank I have no skin in the game and my party line for the last couple hundred points has been to stay out of the way as the secular shift towards streaming media and cord cutting in the near term should be a positive for NFLX. But with sentiment so universally bullish, and the trade apparently so crowded, it wouldn’t take too much to cause a few of these large holders to head for the door at the same time, which I suspect could cause another one of those 35% declines, with 20% coming in one gap.

The company should report Q2 earnings in the third week of July, and aside from unexpected competitive announcements this event should be the next catalyst. Since going public in late 2004, the stock has averaged one day moves post earnings of about 13.5%.

The split itself will likely mean a slightly less volatile stock intra-day and day to day as the liquidity should improve, but this impending split should add nothing to the bull case for owning the stock.

0 Follow-Ups

Mike: Content providers adapt too – $NFLX

By - - Equities on June 10, 2015 8:04 PM 1 Follow-Ups MikeInitial Let's break this down into two parts shall we? Content and distribution. On the distribution side their offering was essentially unique, but that is no longer true. Content is now on demand pure and simple, they have subs, they have growth, they have scale. Everyone i know subscribes, but subscri... Read More →

BK: Take profits in $NFLX without hesitation.

By - - Equities on June 11, 2015 8:40 AM 0 Follow-Ups BKInitial I couldn't agree more with Dan about the NFLX move to all time highs on a stock split - this is the most absurd reason to invest in a stock. But hey, dumber strategies have worked. My view on Netflix was that once HBO went over the top the NFLX business model was broken. I thought competition wou... Read More →
This is Part 1 of a 3 part Debate on Equities