Wednesday, March 09, 2011

Shorting Netflix

As a customer, I love Netflix. I love its services, its branding, its ease, its quality, and its pricing.

As an investor, I've shorted the hell out of it. A year ago, I loved the bonds and thought the company was fairly priced. Now, I think the company is way over priced and I'm even worried about the bonds, which don't mature for more than 5 years. . .

Here's why I'm short:

The company is trading at 66x earnings, and was as high as 80x, up 300% in the last year. This is 3x higher than AAPL, which trades at 20x and is a stock investors supposedly love. While earnings are expected to double next year, bringing that number down to 33x, it's still way to high. Want to know why? Business Model Risk and Competitive Risk.

Business Model Risk:
While the company absolutely dominates the market right now, there is no reason that can't change. There is no reason that can't change QUICKLY. There is no reason why NFLX has to be the winner or even exist in 10 years. They don't own content, they don't own distribution, they don't really own anything...except contracts/customers/technology, none of which are exclusive and all of which can be easily and cheaply duplicated.

Competitive Risk:
From a finance 101 perspective, the company will face significant competition from 4 or 5 of Porter's 5 forces of competition:

Competition from Peers: Amazon/Apple/Google... much larger, stronger companies.

Competition from New Entrants: Duplication is easy, they have no exclusivity with their content (who thought Facebook would become a competitor before yesterday?)

Pressure from Suppliers: Netflix got some sweetheart deals when they first talked about streaming video years ago. Those deals are up soon, and Netflix will have to pay up.

Actual Content: Don't forget, they pretty much only sell "re-runs." No new shows, no new movies.

Competition from Distribution: Cable companies, with whom Netflix relies on for distribution (Internet connections), but also takes $ from, can/will start making netflix or their customers pay for the bandwidth. Why can't Comcast create its own VOD/TV monthly subscription service? There is no reason at all. . .

Customer Loyalty: Currently this is high, but no annual contracts, and so if a better/cheaper product comes around Netflix will lose all pricing power. Price hikes are over.

Without content exclusivity (like DirecTv and its NFL contract), Netflix has enjoyed low cost programming.

Netflix may have a few more great quarters, or even another 2 years...but I can't view a world where Netflix maintains its dominant market share.

Here's a good article supporting

Tuesday, March 01, 2011

Q&A with Fire Island Hater

What's the etiquette for dating at work? Does it matter if they work in your dept or not? Does it matter if they are senior to you or of equal stature?

It's about time I "banged" out another set of "rules." Unfortunately, as I wrote them I realized they're more like guidelines than rules, as all can and most will be broken. May as well start from the top.

1) Don't date a coworker at a small company. Under 20 employees... get a new job first. I know a bunch of guys who quit their jobs in order to date someone at their old firm.

2) Don't date someone that works in your department or on your floor. The best work relationships that actually can last involve people that don't directly work with each other/on top of each other. This rule keeps breakups much cleaner, less awkward.

3) The age of the two employees does not matter, but the SENIORITY does. Do not hook up with one of your subordinates. Likewise, I always tell people that if possible, they SHOULD sleep with their boss. Why? Because you become your boss. You'll move up faster, get paid more, and work less. Your boss has a new project for you? "No thanks." You won't get stiffed on a bonus or passed up on a promotion when he/she has sexually harassed you. In essence, you become the boss.

4) Summer interns: It needs to be near the end of the summer, and you need to make sure they are going to get the offer (even if you're not involved in the hiring process). Obviously, this isn't a long term thing.

5) If he's cheating on his wife, it's not going to work out. Even if he breaks up with her and marries you. He'll move on again.

6) Actually like the person. Don't do it just for fun... there are other, less complicated, options for that.

7) If you ignore rule 6, (and you will) set ground rules. If you hooked up out of passion, you need to have the talk. It can still happen again, it can happen all the time, but you need to tell them rule 8 (especially if they aren't attractive or highly regarded in the office).

8) Lastly, and most importantly, keep it a secret until it's serious...perhaps even until you're engaged!

9) If you do decide to follow rule 8, DON'T SCREW UP RULE 8. Keep your secret a secret. In other words, don't get drunk and make out at the xmas party and have the entire company think you are both sloppy when you've really been dating for 2 years.

What advice is someone like me (29 year old) supposed to give a friend who is contemplating whether or not they should get a divorce? (no kids, married 2 years).

If kids are involved, I say stay together forever. You don't deserve a life of happiness if that means you are going to screw up your kids. If you are single, you can still get out.

Advice isn't really your job. You're supposed to help them find the right answer. Perhaps, if you're close enough to them, the best thing to do is ask them these questions.

Do you still love him/her?
Do you still envision/dream/see yourself in 20-30 years living with this person and growing old with this person?
Do you legitimately want to make it work and are you willing to try harder than you've ever tried to make it work?

If your friend answers yes to these 3 questions, then he/she should obviously not get a divorce. If the love is gone, but the last 2 answers are still yes, then it is not going to be easy, but a divorce can be avoided. Unfortunately, this will take brutal internal honesty on your friends part. If his eyes and heart are straying, it won't be easy to bring them back. Of course, if the answer to the last 2 questions is "no," then a divorce may be unavoidable and the questions will steer your friend in that direction.

While your friend is asking for divorce advice and looking to be convinced one way or the other. Your job is to make sure that friend is making the ultimate decision.