Netflix
Essay title: Netflix
Thesis:
(Please see the Details section for explanations of each bullet point below)
Expectations on Wall Street are extremely high, as Netflix gave up 20% following days after its 1Q earnings update.
With high 2Q expectations, investors may be disappointed again with lower gross margins and a higher churn rate than expected. To add to this, competition is finally picking up with Blockbuster and Walmart entering the market.
On the side, short interest has increased and insiders have begun selling their shares.
Lastly, investors may be missing the large picture of Netflix’s true market potential in the long run.
Background:
Launched in 1998, Netflix is the world’s largest online movie retail service.
For a set monthly fee of $21.99, subscribers can rent as many DVDs as they want, with three movies out at a time and keep them for as long as they like.
The company now operates 24 shipping centers in the United States and can reach 80% of its customers with 1 day delivery.
The company grew revenues by 80% to $100.8 million in 1Q, and has 1.932 million subscribers and 760,000 new trial subscribers, an increase of 82% year-over-year.
Details:
Expectations on Wall Street are extremely high as evidenced by the 80% STRONG BUY/BUY ratings. (10% HOLD, 20% STRONG SELL)
Stock fell over 20% following days after 1Q earnings update.
Company reported larger 1Q loss (11 cents a share) and gross margin 43.6% in low end of guidance.
Company