Greedy When Fearful

Will Netflix repeat Amazon’s history? I think it will rhyme.

In July 2011, Netflix (NFLX) was valued at 16 billion, everything was perfect and people spoke about Netflix with reverence. When they say stocks are priced to perfection this is exactly what they are talking about. Then, the CEO did something stupid called Qwikster and drastically raised prices and customers left in droves. The cost of content increased and many new releases got pulled from their on-demand catalogue. Competition from Hulu and Amazon ramped up. US subscriber growth has slowed. Fast forward to yesterday and Netflix hit a new 52 week low losing 80% of its value from the top and making it worth 3 billion dollars.  Here’s 3 reasons why the market hates Netflix:

1)      Netflix isn’t profitable. Netflix is investing heavily outside the US and who knows if the concept will work in other countries?

2)      Netflix has no moat. It doesn’t matter if they were first in this business. Anybody can put up a website and provide the same product.

3)      Netflix has razor-thin margins. With competition from everywhere, it’s almost impossible to make money when the lowest cost provider wins.

Now, re-read those three reasons but replace Netflix with Amazon. That’s exactly what everyone was saying about Amazon in 2001 after the dot com bubble burst.  Amazon was a 50 billion dollar company and dropped to a 3 billion dollar company from 2000-2001. More than a 90% loss in just one year.  Fast forward to today and Amazon is worth 100 billion dollars. Anyone that dove in after the dot bomb has made 33 times their money.  Fortunes are made when the nerdy underdog gets the girl and wins the game. Not when the arrogant jock scores yet another touchdown.

Netflix will never be as diverse or as good as Amazon is. But I do think history will rhyme a bit. What goes down, must come up! As long as you don’t go bankrupt. Here’s 3 reasons why I think I can sextuple my investment in Netflix by 2016 and am doubling down today.

1)      Netflix has first-mover advantage and this is huge.  Investing heavily in international expansion while losing money in the short term is exactly what they should be doing to hit my 2016 price target.  They brought in almost a billion dollars of revenue last quarter and only 65 million of that was international.

2)      The majority of customers will stay with you if you have a great product at a great price. Netflix has been doing a great job this year keeping people hooked as the average subscriber watched 40 streaming hours of content in June. Those are record breaking numbers and people got mad at CEO Reed Hastings for bragging about his customers watching a billion hours of content.  Amazon and Hulu will be taking market share but this isn’t winner takes all. I think Netflix will be Coke, Hulu will be Pepsi, and Amazon will be Dr. Pepper. Even if I’m wrong on the order profits still ahead.

3)      Netflix brings in about $7 per user. Currently, they have no profit but just in 2010 they were making 7.5% per user.  They actually beat earnings guidance by 5 fold last quarter. They have around 36 million subscribers and only 3.73 million are international. Once their international expansion is complete, I think they will easily hit 7.5% again. If Netflix can keep its lead as the Internet takes over the world, eventually it will follow the path of every other major American brand and actually have more international subscribers than domestic. If that happens, anyone jumping on the train now will be rich.

Now, I’m not going all-in or doing anything stupid here.  When you are trying to predict the future always plan to be wrong. We own 40 stocks and even after doubling-down Netflix only makes up 10% of our holdings. We have at least 5 years for this to play out.

Monty

P.S.:

Below are also other stocks I have purchased since the last update. My wife recently made some picks today to further diversify our holdings.

Michael Kors (KORS).

My wife’s a huge project Runway fan.  Only been public 8 months and started opening stores in 2007. 58% increase in revenue last quarter with a gross margin of 58%. Same store sales increased by 36%.   KORS opened up 71 new stores last year. Michael Kors owns 6.5% of the business. 181 North American Stores.  46 International Stores.

Starbucks (SBUX).  My wife’s favorite addiction. Consumers are worried about economy and showed slower consumer traffic in June and July. 30% off all time high it hit in April. 1.58% dividend.

Annie’s (BNNY). Only been public 5 months and riding the organic movement. Our son loves their food! Net income increased 17% with latest quarterly report. In 2011, the company generated $20 million in profits on $117.6 million in sales, up from $96 million in revenue in 2010 sales and $6 million in profits. The company offers over 125 products, which are sold at over 25,000 retail locations.  There are over 35,000 grocery stores in the United States alone. This is a positive for Annie’s because the company can grow its distribution within the U.S. by 40%.

Also had a lot of winners  over the past two months so followed the philosophy of “Buy More 52 week low sell less 52 week high.”

7/18/2012.

Buy more 52 week low.

Supervalu (SVU), the 3rd largest grocery chain in America is now at a 35 YEAR LOW @ 492 million. Massive debt (6.3 BILLION) and Walmart, Target, and dollar stores are eating their lunch. Can they turn it around? At least they are immune to online sales. PEG -.059. Increased position from 1.3% to 2.3%.

7/17/2012

Sell less 52 week high.

Cedar Fair (FUN) owner of Knott’s Berry Farm hit a 52 week high today @ 1.79 billion. PEG 2.24. Sold 20% of position to lock in gain of 48.2% on those shares. FUN now makes up 3.6% of portfolio instead of 4.8%. FUN is up 50% for the year and gold only up 1%. So far my call of amusement parks being a better investment than Gold is correct! https://greedywhenfearful.com/2011/12/16/3-reasons-why-amusement-parks-are-a-better-investment-than-gold-fun/

7/12/2012

Buy more 52 week low.

Supervalu (SVU) hit 52 week low today @ 575 million. OUCH, a one day drop of 50%!! PEG .35. Increased SVU position from 1% to 1.6%. In one day this turned from a massive dividend story to a turnaround play. CEO Herkert says SVU is still profitable, bankruptcy isn’t on the table. This means eventually the stock will recover and the dividend will come back. By 2017 I believe I will be happy about this investment.

7/11/2012

Buy more 52 week low.

MAKO hit 52 week low today @ 637 million. OUCH, a one day drop of 40%!! PEG -.79. Increased position from .7% to 1.2%. They sold 9 one-million dollar robots instead of the projected 11. I never expected robotic surgery to be a smooth ride so this doesn’t surprise me at all. But, a 40% sell off for missing by two and lowered guidance? Classic over reaction!

7/2/2012

Sell less 52 week high.

Boston Beer (SAM) hit 52 week high today @ 1.59 Billion. PEG 3.14. Sold 20% of position to lock in a gain of 85% on those shares. SAM now makes up 3.7% of portfolio instead of 4.6%.

6/18/2012

Buy more 52 week low sell less 52 week high.

EBAY hit 52 week high today @ 54.87 Billion. PEG 1.30. Sold 20% of position to lock in a gain of 72.7% on those shares. EBAY now makes up 2.1% of portfolio instead of 2.8%.