Written by |

Financial Horror Movie: NFLX Post Earnings 10.24.12

[shareaholic app="share_buttons" id="24556347"]

The massive implied volatility has more or less been realized since shares started to tumble after their all time high of $300 in July 2011, but what has caused this surge in volatility and does NFLX’s outlook justify said price gap.

In short, it really does all come down to NFLX’s consolidated global performance. Here the company guided to a net loss of $13 million to a slight profit of $2 million.  The proverbial bell that rang at the top, considering hindsight is 20-20, was when the company decided to raise its monthly fees to subscribers in mid 2011. Since then, paid subscribers (international/domestic streaming and DVD) have fallen off along with every other metric.

As with any business, watching cash is key to gain insight if one is successful or not. In the case of NFLX, the latter has been favored for the company has been losing cash. In Q3 total cash was down $32 million. The net income line for Q3 may be deceiving for FCF (free cash flow) was down $20 million. FCF being the amount of cash generated by the business after taking into account cash required to properly grow said business. According to NFLX, “significant uses of cash in the quarter (relative to net income) were cash payments for content (in excess of the P&L expense), cash payments for PP&E (including cache boxes for our Open Connect program), and reductions in miscellaneous accounts payable and accrued expenses.”

While NFLX may be a questionable investment, it is definitely a great trading vehicle. Weekly IV was at 180% before the event, and it got down to 90% today… a massive crush. The weekly options also have nice bid ask spreads, even out to the OTM strikes. Short interest is at about 29% and the analyst community has 7 buys, 22 holds, and 8 sells on NFLX. The average price target for NFLX is about $72 and next year the analysts are expecting $0.82 in EPS.

 Screen shot 2012-10-24 at 8.53.25 AM

Feel free to e-mail any comments, feedback, suggestions, or general inquiries to…

Author

mark@keeneonthemarket.com

Data courtesy of Thinkorswim

Written by |

Leadership Matters 10.23.2012

[shareaholic app="share_buttons" id="24556347"]

Yahoo vs. Hewlett Packard

Comparing these two examples is a perfect example.  The differences couldn’t be starker. While their challenges are somewhat different, how they are responding to them shouldn’t be.  Hewlett is facing a secular change in their business.  The desktop is being eclipsed by a more mobile tablet.  Yahoo on the other hand has had difficulty determining how to monetize their business.  Yahoo is one of the most visited sites on the web.

Meg Whitman vs. Marissa Mayer

Whitman and Hewlett have responded to their challenges with no real vision or strategy.  Cost cutting and layoffs often need to happen in a company that needs to reinvent itself but it can’t be the only plan.  Whitman has really not laid forth any vision for the future of HPQ.  Neither has she been overly optimistic about a quick turnaround leaving shareholders and analysts in the lurk. Mayer on the other hand has shown some real moxie.  When most new CEO’s come into a new situation they try to set expectations low and buy themselves time for a turnaround.  A honeymoon period so to speak. Mayer has not done this. 

She has been aggressive in going after key talent in order to try to build a management team capable of reinvigorating Yahoo.  The recent conference call was amazing in the fact that she did not back down from sharing a vision for Yahoo.  Rather than punt and say they are evaluating alternatives, she grabbed the bull by the horns and laid out her vision. She wants to focus the company on the user experience.  She talked about the daily habits of users with regards to news, finance, email, and search.  The company must focus on these in order to grow the company.

Vision Matters

Whether or not Yahoo can take on Google for search or figure out how to better monetize their users remains to be seen.  But after the conference call you have a lot better feeling about Yahoo than the day before.  Mayer instilled confidence.  Whitman has done nothing like this. A company in a turnaround must have a plan and a vision that is articulated to investors and analysts.  Yahoo and Mayer have done this.  Whitman and HPQ have not.  You will continue to see this reflected in their share prices going forward.