Lioness Associates, Inc.

Economic & Corporate Risk/Yield Reports

July 25, 2012  -- Netflix Risk/Yield for 2012

Netflix disappointed investors in it's recent earnings report  (see article). This company is investing heavily in expanding operations overseas and has made it clear that their aim is to have a profitable quarter and then open a new market which causes losses and then continue with getting profitability back and then opening in a new market.  They plan to continue this process over the next few years to maximize their growth potential. This long term plan is not sitting well with investors looking for profits sooner rather than later.

If just the subscriber numbers for the streaming services for this company are looked at, they appear to be increasing and are expected to increase next quarter. Conventional thought would rate the streaming business as one that is expected to grow as a market.  On the other hand, their DVD subscriber rate is decreasing but, it should be noted that the DVD business is decreasing in general and maybe a wise choice would be to leave a dying business gradually, in effect
— let it fade out.  Coinstar, a competitor, has noted in their last quarterly report that while they are increasing their share of the DVD movie business it is not because the business is getting bigger, rather it is because they are taking market share from others.

Some of Netflix's numbers suggest that the subscriber rate for the next quarter could increase from 0.9% to 5.29% (current =36.8 and low end for next qtr = 37.15 to high end for next qtr =38.75).  Considering that total subscribers last year were approx 25 million (see Netflix 2011) at the September 2011 timeframe, then the year-to-year growth would be 48.6% to 55% (subscriber rate between 37.15  million and 38.75 million).  Note, the base numbers are available on the Netflix web site.  Granted, most of this growth in subscribers occurred as a result of breaking apart the streaming and DVD portions of the business in 2011. 

The NFLX Risk/Yield 2012 graph indicates that there was already a yield momentum in progress at the start of the year.  Another move into yield occurred in April and another move into yield started in the June period. There is an increase of risk starting in May of 2012 and continuing into July of 2012 at which time the risk starts to decrease.

The NFLX 2012 Delta Core/Transient graph provides a better picture of the delta and the movements into yield or risk are more obvious.  Note, while the core move into yield occurring in July appears strong, there is not a corresponding move of the transient into yield which could signify a general lack of interest from the public. So, while this graph does have a 400+ core move into yield, it is not accompanied by a transient move into yield.

There is a likelihood that information will be released in September period on the next country that Netflix will target for expansion. 

The next earnings are likely to occur at the end of October (estimated to be 3 months forward) and looking at the NFLX 2012 Delta Core/Transient graph for that period, the core would have peaked before the earnings suggesting that the earnings might disappoint investors again.

We'll check back in a few months and see where this stock headed in the interim.



Disclosure as of 7/25/202 - Netflix (NFLX) is not part of our portfolio at this time.