Netflix stock hit an all time high of $133.8 in trading today. Netflix stock has been on a tear since late 2008 from a low of $18 or so.
Netflix recently announced a content agreement with Epix which will allow Netflix to offer streaming movies to its subscibers. Netflix will pay $1 billion over 5 years for the content licensing.
"EPIX™andNetflix, Inc. [Nasdaq: NFLX] today announced an agreement through which Netflix members can instantly watch an array of new releases and library titles from EPIX streamed over the Internet from Netflix. Movies from the multi-year deal will begin streaming from Netflix on September 1 and include movies from Paramount, Lionsgate and MGM.
EPIX has subscription pay TV rights to new releases and movies from the libraries of its partners and will make these movies available to Netflix 90 days after their premium pay TV and subscription on demand debuts. Historically, the rights to distribute these films are pre-sold to pay TV for as long as nine years after their theatrical release.
For Netflix, the agreement is a significant step in building the company’s streaming offer, adding many popular movie titles from some of the world’s leading studios. It adds meaningfully to a growing library of movies and TV shows that can be watched instantly on TVs via a range of leading consumer electronic devices capable of streaming from Netflix and on computers."
Two Sell Side research companies differ in their opinion on Netflix.
Piper Jaffray analysts recently said, “We maintain our Overweight rating on NFLX and our price target of $140, based on 38x CY11E EPS.”
However, UBS came out with a report today reiterating its Sell rating and $90 price target on Netflix (NASDAQ: NFLX) as the recent news with Epix is being misinterpreted the investment bank said.
UBS states that the deal will lack new releases and large Dreamworks (NYSE: DWA) deals such as Shrek due to those being part of separate negotiations. It also believes the cost of goods will offset any Epix revenues.
I looked at the 2009 10-k today to see what Netflix has been spending on content acquisition. Here are the relevant lines from the 10k that explain the accounting treatment for content acquisition costs.
"Additionally, cash outflows for the acquisition of the DVD library, net of changes in related accounts payable, are classified as cash flows from investing activities on our consolidated statements of cash flows. Cash outflows associated with the streaming content are classified as cash flows from operating activities on our consolidated statements of cash flows. "
In the Cash flows from operating segment, I see a line item "Content library" for $64 million. and in the investing section,"Acquisitions of content library " for $193 million. So, that means NFLX spent $193 million for DVDs in 2009 and another $64 million for streaming content in 2009. The streaming content costs will increase to $200 million per year for the next 5 years. Its possible that the DVD library cost go down, but its not a sure thing. Over the last 3 years Netflix spent $208 million, $162 million and $193 million for DVD content acquisition.
In my previous article, I had computed NFLX free cash flow as $97 million ( after accounting for the DVD content acquisition costs that are reported on the Cash from Investing activities). With this increased expense for content acquisition costs, free cash flows could come out even lower. While Netflix has been growing subscribers rapidly, its valuation seems to be stretched. NFLX trades at 54x trailing earnings for an earnings yield of 1.8%. NFLX trades at 70x trailing FCF, 3.7x sales and 20x EV/ OCF. Employing a reverse DCF and using $97 million as its 2009 FCF, I find that NFLX needs to grow its FCF at 40% per year for the next 10 years to justify its current valuation. Even if you take the FCF as $280 million by ignoring the DVD content acquisition costs, NFLX needs to grow FCFat 22% per year for the next 10 years to justify current valuations. ( I assumed a 12% discount rate and a 3% terminal growth rate)
Disclosure: I am short Netflix via put options at the time of publishing this post. My positions may change at any time without any further updates. Please conduct your own research before considering investments based on these or any ideas on this blog. This post is to be considered as my research and not advice or a recommendation to buy or sell any of the stocks discussed.
Netflix recently announced a content agreement with Epix which will allow Netflix to offer streaming movies to its subscibers. Netflix will pay $1 billion over 5 years for the content licensing.
"EPIX™andNetflix, Inc. [Nasdaq: NFLX] today announced an agreement through which Netflix members can instantly watch an array of new releases and library titles from EPIX streamed over the Internet from Netflix. Movies from the multi-year deal will begin streaming from Netflix on September 1 and include movies from Paramount, Lionsgate and MGM.
EPIX has subscription pay TV rights to new releases and movies from the libraries of its partners and will make these movies available to Netflix 90 days after their premium pay TV and subscription on demand debuts. Historically, the rights to distribute these films are pre-sold to pay TV for as long as nine years after their theatrical release.
For Netflix, the agreement is a significant step in building the company’s streaming offer, adding many popular movie titles from some of the world’s leading studios. It adds meaningfully to a growing library of movies and TV shows that can be watched instantly on TVs via a range of leading consumer electronic devices capable of streaming from Netflix and on computers."
Two Sell Side research companies differ in their opinion on Netflix.
Piper Jaffray analysts recently said, “We maintain our Overweight rating on NFLX and our price target of $140, based on 38x CY11E EPS.”
However, UBS came out with a report today reiterating its Sell rating and $90 price target on Netflix (NASDAQ: NFLX) as the recent news with Epix is being misinterpreted the investment bank said.
UBS states that the deal will lack new releases and large Dreamworks (NYSE: DWA) deals such as Shrek due to those being part of separate negotiations. It also believes the cost of goods will offset any Epix revenues.
I looked at the 2009 10-k today to see what Netflix has been spending on content acquisition. Here are the relevant lines from the 10k that explain the accounting treatment for content acquisition costs.
"Additionally, cash outflows for the acquisition of the DVD library, net of changes in related accounts payable, are classified as cash flows from investing activities on our consolidated statements of cash flows. Cash outflows associated with the streaming content are classified as cash flows from operating activities on our consolidated statements of cash flows. "
In the Cash flows from operating segment, I see a line item "Content library" for $64 million. and in the investing section,"Acquisitions of content library " for $193 million. So, that means NFLX spent $193 million for DVDs in 2009 and another $64 million for streaming content in 2009. The streaming content costs will increase to $200 million per year for the next 5 years. Its possible that the DVD library cost go down, but its not a sure thing. Over the last 3 years Netflix spent $208 million, $162 million and $193 million for DVD content acquisition.
In my previous article, I had computed NFLX free cash flow as $97 million ( after accounting for the DVD content acquisition costs that are reported on the Cash from Investing activities). With this increased expense for content acquisition costs, free cash flows could come out even lower. While Netflix has been growing subscribers rapidly, its valuation seems to be stretched. NFLX trades at 54x trailing earnings for an earnings yield of 1.8%. NFLX trades at 70x trailing FCF, 3.7x sales and 20x EV/ OCF. Employing a reverse DCF and using $97 million as its 2009 FCF, I find that NFLX needs to grow its FCF at 40% per year for the next 10 years to justify its current valuation. Even if you take the FCF as $280 million by ignoring the DVD content acquisition costs, NFLX needs to grow FCFat 22% per year for the next 10 years to justify current valuations. ( I assumed a 12% discount rate and a 3% terminal growth rate)
Disclosure: I am short Netflix via put options at the time of publishing this post. My positions may change at any time without any further updates. Please conduct your own research before considering investments based on these or any ideas on this blog. This post is to be considered as my research and not advice or a recommendation to buy or sell any of the stocks discussed.
