5 ms·

I was looking at purchasing shares in Netflix the first time the stock dropped. I believe at that time netflix was trading at 35x earnings. At the close today i

by sudonim 15y ago

I was looking at purchasing shares in Netflix the first time the stock dropped. I believe at that time netflix was trading at 35x earnings. At the close today it was 30x earnings and now even lower in after hours trading. I never bought the shares because of the high multiple. However, I believe the current bad news is a blip on the radar in what will continue to be a tremendously successful company. Can someone explain if I'm evaluating Netflix wrong? Others seem all over the map: Apple trades at 14.6x earnings Amazon trades at 105x earnings Microsoft trades at 9.87x earnings

hkmurakami 15y ago
P/E ratio is one representation of how the market sees the company growing in the future. It's honestly an "emotional" number. While Apple continues to defy the pundits, it _is_ difficult to see their profits become, say, 5x over the next ten years (since they already rake in $100B+ in revenue). Also, one could legitimately argue that Apple has real competitors in every business they are involved in (PC makers, Android, Samsung, HTC, etc), and that their markets are inherently saturated (of course, one can argue otherwise too). Meanwhile, I suppose people see more growth potential in Amazon, because the ebook market itself is still growing, and their EC2 service is coinciding with the growth of hosted deployment of services. At the least, I can see how it's easier to trick yourself into thinking Amazon will have a stronger growth trajectory (it probably helps that Amazon's revenues are somewhat smaller at ~$30B). It also helps that Amazon has become a monopoly in their core business of online retail (with perhaps ebay being its main competitor), and application hosting seems (to me) a duopoly between EC2 and Rackspace.
tomkarlo 15y ago
P/E is only one metric and it's potentially very deceptive. You're using a PE that's uncorrected for expenses that are essentially investment in future business growth rather than a fundamental part of the business model. Amazon, for example, is hiring tons of new employees to build out its AWS business; that's a positive sign (it shows they believe that's a good investment) but in the short term it will drive down their earnings, because the cost of those employees is incurred now in exchange for business in future years. So with Amazon, you have a denominator that's growing, and a numerator that's depressed by the investment in growth. That results in a very high PE. MSFT and Apple, by comparison, are great companies but the market isn't expecting them to grow a lot (esp given how big they already are.) They're priced at a level where the market basically expects their earnings to stay steady going forward. 30X earnings is still not cheap for a tech company. It's in a spot where you'd have to look at the growth prospects, etc. to decide if it's a good deal. PE makes the most sense if you're comparing very mature companies with similar size, growth and operating metrics. If that's not the case, it's not very useful.
- wiredfool 15y ago
  Right, but Amazon is in a heavy infrastructure, heavy competition, low margin business. And their margins are small and getting smaller. 2% or so IIRC. They're less poised for explosive growth than Apple. On the other hand, they're here for the long haul. Apple is spending a lot on infrastructure, but they're in a lower competition, high margin business. 38% margin IIRC. (yes, there's competition. But Amazon's competition is anyone selling anything, and Apple's is anyone who's managed to make a good smartphone.) The market hasn't been expecting Apple to grow for years now based on PE, they've been under 20 since the 2008 crash and growing their earnings like crazy. Their PE at the low point was 11ish, and now it's 14ish, less than the historical SP500 valuation. For Comparison's sake, last quarter, Apple earned 6.8 billion. Amazon's net sales were 9.9 billion. Pretty soon, I'd expect Apple's profits to be bigger than Amazon's sales. Something's not rational here. Might be me. Might be the market.
  - tomkarlo 15y ago
    "Right, but Amazon is in a heavy infrastructure, heavy competition, low margin business. And their margins are small and getting smaller. 2% or so IIRC." Amazon's gross profit ran north of 20% last quarter. (http://www.google.com/finance?q=NASDAQ:AMZN&fstype=ii http://www.google.com/finance?q=NASDAQ:AMZN&fstype=ii) They're a dominant player in both online retail and cloud services, they're now providing cloud services to government entities, and they're growing like crazy. They're hiring like crazy and that's driving down their net income (I think they hired like 30% of their employees in the past year.) The market clearly believes they're on their way to double or quadruple their business over the next few years as more shoppers go online and more services go to AWS. Apple is doing great, but they're 4X the size of Amazon in terms of market cap, and arguably at their "peak" in terms of everything going their way. They're going to keep growing, but they're already the largest company by market cap... are they likely to double? The market doesn't seem to believe that. Is that right? I don't know... it just seems to be what the pricing currently indicates. Edit: It's also worth noting that spending on infrastructure does not have the same effect as spending on employees. Infrastructure costs are spread out over the life of the equipment, whereas payroll is expensed as incurred.
malay 15y ago
I thought the same after the first dip (was going to purchase at ~$150/share), but ended up convincing myself there was a stronger bear case to be made. Primarily, I considered: 1. Content producers control Netflix's ability to succeed; they could either support significant fragmentation across multiple service providers (allowing many entrants/competitors and driving up prices for their content) or distribute directly (eliminate middle men altogether) 2. Multiple competitors are or could potentially price much lower than Netflix streaming based on totally different business models; Amazon subsidizes streaming to drive sales in their core business and Google could do the same using an advertising-based model 3. Last point here is pretty subjective, but I didn't think Netflix was a likely takeover target by the majors (i.e. key competitors), especially given that Hulu is also on the block; Google already has platform, users and device-level distribution through YouTube and Amazon has much the same, in addition to already profiting from Netflix's growth (through AWS) I had problems making a long-term case for NFLX and the blunders of leadership further eroded my confidence. I'm not sure the stock is truly worth about 1/3 of what it was a few months ago, but I'm still not buying it.
steve8918 15y ago
I jumped in at $86 after hours, with only 100 shares. They just simply got decimated after hours, but it felt pretty overdone, especially with only losing 800k customers. Seems worth it to take a stab. That being said, the business model is doomed. They don't control the content, so they are essentially a technology company. Their technology is great, I had them for a few months, but unless they own the content they will continue to get gouged by content providers. It's a no-win situation for them.
- powertower 15y ago
  When a drop in stock price is disproportionate to the available news, then you can be sure that the real cause of that drop is due to major players and insiders getting out because they know more than the public does and more problems are about to come out.
  - steve8918 15y ago
    I'll have to check my datafeed, but it doesn't seem like there was a disproportionately large amount of volume after hours. The major players and insiders don't get out after the earnings release, they get out weeks before during the distribution phase. Most after-hours action is algo-bots and retail investors. The real action starts tomorrow morning, so get your popcorn ready!
    - powertower 15y ago
      $300 down to $80 in a span of a couple of months on news of a known/expected 3-5% of users leaving, while profits are increased, I would say count as "disproportionately large". The way insiders work is like this... If they know they need to get out, but can't due to SEC insider rules (you can't sell a stock about to tank "just because", without getting in trouble later on), they take the first public opportunity to do so... On the release of any public bad news, that way their asses are covered.
  - cpeterso 15y ago
    Catching a falling knife can be dangerous (literally or metaphorically).

by sudonim 15y ago

hkmurakami 15y ago

P/E ratio is one representation of how the market sees the company growing in the future. It's honestly an "emotional" number. While Apple continues to defy the pundits, it _is_ difficult to see their profits become, say, 5x over the next ten years (since they already rake in $100B+ in revenue). Also, one could legitimately argue that Apple has real competitors in every business they are involved in (PC makers, Android, Samsung, HTC, etc), and that their markets are inherently saturated (of course, one can argue otherwise too). Meanwhile, I suppose people see more growth potential in Amazon, because the ebook market itself is still growing, and their EC2 service is coinciding with the growth of hosted deployment of services. At the least, I can see how it's easier to trick yourself into thinking Amazon will have a stronger growth trajectory (it probably helps that Amazon's revenues are somewhat smaller at ~$30B). It also helps that Amazon has become a monopoly in their core business of online retail (with perhaps ebay being its main competitor), and application hosting seems (to me) a duopoly between EC2 and Rackspace.

tomkarlo 15y ago

P/E is only one metric and it's potentially very deceptive. You're using a PE that's uncorrected for expenses that are essentially investment in future business growth rather than a fundamental part of the business model. Amazon, for example, is hiring tons of new employees to build out its AWS business; that's a positive sign (it shows they believe that's a good investment) but in the short term it will drive down their earnings, because the cost of those employees is incurred now in exchange for business in future years. So with Amazon, you have a denominator that's growing, and a numerator that's depressed by the investment in growth. That results in a very high PE. MSFT and Apple, by comparison, are great companies but the market isn't expecting them to grow a lot (esp given how big they already are.) They're priced at a level where the market basically expects their earnings to stay steady going forward. 30X earnings is still not cheap for a tech company. It's in a spot where you'd have to look at the growth prospects, etc. to decide if it's a good deal. PE makes the most sense if you're comparing very mature companies with similar size, growth and operating metrics. If that's not the case, it's not very useful.

wiredfool 15y ago
Right, but Amazon is in a heavy infrastructure, heavy competition, low margin business. And their margins are small and getting smaller. 2% or so IIRC. They're less poised for explosive growth than Apple. On the other hand, they're here for the long haul. Apple is spending a lot on infrastructure, but they're in a lower competition, high margin business. 38% margin IIRC. (yes, there's competition. But Amazon's competition is anyone selling anything, and Apple's is anyone who's managed to make a good smartphone.) The market hasn't been expecting Apple to grow for years now based on PE, they've been under 20 since the 2008 crash and growing their earnings like crazy. Their PE at the low point was 11ish, and now it's 14ish, less than the historical SP500 valuation. For Comparison's sake, last quarter, Apple earned 6.8 billion. Amazon's net sales were 9.9 billion. Pretty soon, I'd expect Apple's profits to be bigger than Amazon's sales. Something's not rational here. Might be me. Might be the market.
- tomkarlo 15y ago
  "Right, but Amazon is in a heavy infrastructure, heavy competition, low margin business. And their margins are small and getting smaller. 2% or so IIRC." Amazon's gross profit ran north of 20% last quarter. (http://www.google.com/finance?q=NASDAQ:AMZN&fstype=ii http://www.google.com/finance?q=NASDAQ:AMZN&fstype=ii) They're a dominant player in both online retail and cloud services, they're now providing cloud services to government entities, and they're growing like crazy. They're hiring like crazy and that's driving down their net income (I think they hired like 30% of their employees in the past year.) The market clearly believes they're on their way to double or quadruple their business over the next few years as more shoppers go online and more services go to AWS. Apple is doing great, but they're 4X the size of Amazon in terms of market cap, and arguably at their "peak" in terms of everything going their way. They're going to keep growing, but they're already the largest company by market cap... are they likely to double? The market doesn't seem to believe that. Is that right? I don't know... it just seems to be what the pricing currently indicates. Edit: It's also worth noting that spending on infrastructure does not have the same effect as spending on employees. Infrastructure costs are spread out over the life of the equipment, whereas payroll is expensed as incurred.

malay 15y ago

I thought the same after the first dip (was going to purchase at ~$150/share), but ended up convincing myself there was a stronger bear case to be made. Primarily, I considered: 1. Content producers control Netflix's ability to succeed; they could either support significant fragmentation across multiple service providers (allowing many entrants/competitors and driving up prices for their content) or distribute directly (eliminate middle men altogether) 2. Multiple competitors are or could potentially price much lower than Netflix streaming based on totally different business models; Amazon subsidizes streaming to drive sales in their core business and Google could do the same using an advertising-based model 3. Last point here is pretty subjective, but I didn't think Netflix was a likely takeover target by the majors (i.e. key competitors), especially given that Hulu is also on the block; Google already has platform, users and device-level distribution through YouTube and Amazon has much the same, in addition to already profiting from Netflix's growth (through AWS) I had problems making a long-term case for NFLX and the blunders of leadership further eroded my confidence. I'm not sure the stock is truly worth about 1/3 of what it was a few months ago, but I'm still not buying it.

steve8918 15y ago

I jumped in at $86 after hours, with only 100 shares. They just simply got decimated after hours, but it felt pretty overdone, especially with only losing 800k customers. Seems worth it to take a stab. That being said, the business model is doomed. They don't control the content, so they are essentially a technology company. Their technology is great, I had them for a few months, but unless they own the content they will continue to get gouged by content providers. It's a no-win situation for them.

powertower 15y ago
When a drop in stock price is disproportionate to the available news, then you can be sure that the real cause of that drop is due to major players and insiders getting out because they know more than the public does and more problems are about to come out.
- steve8918 15y ago
  I'll have to check my datafeed, but it doesn't seem like there was a disproportionately large amount of volume after hours. The major players and insiders don't get out after the earnings release, they get out weeks before during the distribution phase. Most after-hours action is algo-bots and retail investors. The real action starts tomorrow morning, so get your popcorn ready!
  - powertower 15y ago
    $300 down to $80 in a span of a couple of months on news of a known/expected 3-5% of users leaving, while profits are increased, I would say count as "disproportionately large". The way insiders work is like this... If they know they need to get out, but can't due to SEC insider rules (you can't sell a stock about to tank "just because", without getting in trouble later on), they take the first public opportunity to do so... On the release of any public bad news, that way their asses are covered.
- cpeterso 15y ago
  Catching a falling knife can be dangerous (literally or metaphorically).