Now on Netflix: gravity

October 22, 2013

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

Netflix’s third-quarter earnings report contained a lot of great news: profits, revenue, and new subscriber numbers were all much higher than this quarter last year — plus the company finally surpassed HBO in number of subscribers (domestically, at least).

It’s now clear that Netflix sees premium cable networks as its competition: In an interview with Nancy Hass earlier this year, Netflix’s chief content officer, Ted Sarandos, said, “the goal is to become HBO faster than HBO can become us”. In the interview, he also floated ideas about radically changing the way that television is presented, down to the basic structure of an episodic series. Netflix is also reportedly in talks with Comcast and Suddenlink Communications to make its app viewable on cable boxes.

Netflix’s share price spiked to $382 from $354 overnight Monday, only to end the day back at $322 after rumors spread that Carl Icahn had dumped his shares. He later confirmed on Twitter that he halved his stake. But the “plunge” just put it back where it opened last Thursday. It’s current share price is up 480% from this time last year.

The question, says Michael Santoli, is “whether the shares are wildly overvalued by a herd of deluded momentum investors, or properly pricey to account for the company’s stellar growth record and vast opportunities to grab an enormous share of the paid media economy”.

CEO Reed Hastings seemed somewhat skeptical of the market in his letter to investors, comparing today’s situation to his company’s situation a decade ago. In 2003, Netflix’s stock price surged to $38 from around $2 per share (remember DVD-by-mail?), only to drop back down to $10 in mid-2004 after Blockbuster, Walmart, and Amazon all seemed poised to be competitive with Netflix’s DVD business. “In calendar year 2003 we were the highest performing stock on Nasdaq. We had solid results compounded by momentum-investor-fueled euphoria. Some of the euphoria today feels like 2003”, Hastings writes.

Kid Dynamite says that Hastings should capitalize on his surging stock price and sell stock in a secondary offering, quoting casino magnate Steve Wynn:

No company gets to be worth twice as much in 60 days as it was before to any intelligent person, so when that happens, we take advantage of it. If everybody is so hungry for shares, we let them have some. If the shares go down, we buy them.

And the price may soon be going down, according to Lazard analyst Barton Crockett. Buried in the earnings announcement was news that the company may soon change its accounting practices to pay the bulk of negotiated license fees upfront, instead of over the course of the contract, because its viewers tend to tune in right after a new show is released.  – Shane Ferro

On to today’s links:

Your Daily Outrage
The nightmare of our privatized youth prisons – Chris Kirkham

Primary Sources
The US economy added a mildly disappointing 148,000 jobs in September – BLS

New Normal
Amazon shares are up 150% since mid-2010, which was the last time the company had real profit – NYT

Long Reads
New York City’s hidden homeless – Ian Frazier

JPMorgan
The clearest take on the massive $13 billion JPMorgan settlement – Felix

New Normal
Parents’ basements now slightly emptier – Cardiff Garcia

Alpha
How Wall Street fed Puerto Rico’s $70 billion borrowing binge – Bloomberg

UGH
“The unemployment rate is now the lowest since November 2008″: Why that’s not actually good news – Neil Irwin

Popular Myths
The recession and the slow recovery, not Obamacare, are why levels of part-time work are so high – Ben Casselman

Alpha
Dear Wall Street: State-like entities almost never go bust – Dan Gross

Right On
“Credit Suisse believes taxation is an option to fund growing health costs and reducing sugar intake” – Business Insider

Oxpeckers
The way middle-aged white men work now – Choire Sicha

Analogies
“I’m a giant vat of creative juices” – David Pogue

Apple
Apple likely to sell ultra-high def TVs in 2014, analyst says – Bloomberg

Relatively Lewd Bloomberg Headlines
Buffett Says Dimon Had to Bare Throat in Submission – Bloomberg

Follow Counterparties on Twitter. And, of course, there are many more links at Counterparties.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/