As predicted in my initial blog on Netflix (NFLX), back on January 30th, 2012, quarterly reporting for this company is becoming a wild ride for their faithful stakeholders. Obviously the major headline is subscriber growth or lack of it compared to expectations. The initial market reaction to NFLX’s announcement sent the stock tumbling 15% in after hours trading. I have written three blogs on Netflix not only analyzing in detail the financial statements of the company but also making predictions on the company’s share price. My hope in writing these blogs and others is to make everyone a better investor. If you have lost money in this position since January, then my hope is these blogs on NFLX will help you look at companies differently and start to explain why your sitting on losses or reduced gains.
The Good News
OK, Netflix ended down 12% on the day, and you see good news! Are you kidding me!
Let me explain.
Here is our Model Price chart, as of the end of trading October 24, 2012. This chart includes NFLX’s 3rd quarter balance sheet.
Netflix with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of NFLX subsequent to this post will be maintained on Facebook, here.
Since the price collapse back on July 25, 2012, nothing has really changed fundamentally in the stock. Since this date NFLX has bobbed in the zone between EBV+6 and EBV+5. Yes, even though NFLX fell 12% today, it didn’t transit down through EBV+5. Remember these parallel lines look simplistic enough however they are fundamental – see Key Concepts. These EBV lines come directly from the balance sheet and are structural or rules based. Notice how NFLX has come close to EBV+5 and used this fundamental structural line as support. Granted NFLX has been volatile, however no transits have occurred, upward or downward since the release of 2nd quarter earnings.
What if Netflix transits down through EBV+5?
Then fundamentally things will change a lot for this company. The best way to describe what is going on currently with NFLX, “the market” is supporting NFLX and what it is doing, I’m guessing here, business model wise. See, some of our EBV levels are more significant then others. EBV+5 is one of those important levels. If NFLX transits down through EBV+5 or as I have indicated $54.65, “the market” will be taking away latent capital; capital the company can use to expand their business or do whatever management seems fit. The way we look at companies trading over EBV+5 is “the market” believes in you and your story. Transiting down through EBV+5, means “the market” is saying your mortal. A mortal company that is earnings based not valuation based. Currently “the market” doesn’t care about earnings on NFLX because of where the company trades. If there is a negative transit of EBV+5, this will be a different company in “the market’s” eyes. If investors’ considered earnings in terms of valuation then our calculated model price, how we define fair value, is 66% lower then the close of $60.12 which occurred today.
Investors and other stakeholders have had a wild ride with NFLX over the last year or so. However there is another important test for everyone concerned if NFLX were to transit through EBV+5 or $54.65. “The market” will be the only one to know whether NFLX belongs above EBV+5 or not and “the market” can make this determination at anytime. When “the market” speaks will you be listening?
My other posts on Netflix, sequentially