Tuesday, September 10, 2013

Netflix (NFLX) - Is this the Most Powerful Firm in Entertainment? Some Things I Bet You Didn't Know... But Want to.

NFLX is trading $309.53, up 5.2% with IV30™ up 5.5%. The LIVEVOL® Pro Summary is below.

Netflix, Inc. (Netflix), incorporated on August 29, 1997, is an Internet subscription service streaming television shows and movies. The Company’s subscribers can watch unlimited television shows and movies streamed over the Internet to their televisions, computers and mobile devices, and in the United States, subscribers can also receive digital versatile discs (DVDs) delivered to their homes.

This is another stock and volatility note on NFLX and in many ways is the continuation of my prior post on 4-25-2013:

Netflix (NFLX) - Vol Nears Multi-Year Lows as Stock Explodes; Hollywood Take Note -- Another Shot Across Major Distributor’s Bows

I have included the Symbol Summary at the time of that post, below:

We can see that NFLX is up more than 40% since then and today has finally eclipsed its all-time high set back two-years ago. This is a firm that saw it's stock price go from ~$300 to ~$50 and for all intents and purposes was getting fit for a coffin by Wall St.

But then something magical happened. Something that the music industry could not do, something that Myspace.com couldn't do, something that most companies can't do -- management changed the direction of the firm and absolutely smashed Wall St. and Hollywood in the mouth.

Here's a snippet from my post on 4-25-2013, before we get to today's news.

We can see the wild ride in NFLX stock over the last two-years, but really it’s been a five-year ride. A lot of respect has to be levied at the feet of NFLX management for doing such a stellar job of pulling the firm out of what looked to be a hopeless situation just a few months ago. And, on a personal note (and as a professional screenwriter), “House of Cards” was absolutely brilliantly done – an in house NFLX production which has fired a shot back across the bow of the largest content distributors in Hollywood (Sony, Disney, Paramount, Warner Bros, Lions Gate, Fox, NBCUniversal).

NFLX has taken on the industry big boys… again…

I wonder if in a few years, the next time we discuss the most powerful distributors in Hollywood, if NFLX is on the list... At the top...

That last sentence in bold is suddenly looking like a truism rather than a pipe dream. Let's start the story with the two year Charts Tab, below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the tail end of the stock collapse and then the incredible recovery and now move to a new all-time high.

So why is this happening to NFLX?  Well, a lot of reasons, but one of the biggest is pretty simple:

NFLX now decides which TV shows are hits.  Yeah, that's right.  For example, the AMC original show Breaking Bad, the highest rated TV show ever by meta critics, was at a point after season 4 where its record viewership for any one episode was ~1.5 million people.  That's actually very low.  CBS has nights where shows hit 20 million.  The Walking Dead (also on AMC) hit over 12 million.  So, Breaking Bad, though a bonanza on the critical side, was actually kind of a poor performer in terms of viewership.  Then NFLX happened.

An agreement was struck to put all of the "Breaking Bad" old seasons on NFLX for free (everything is free on NFLX with the monthly subscription). The first episode of season 5 aired to 3 million viewers (so a 100% increase).  Then, the first episode of season 5 part II aired to 6 million viewers (NB: My numbers may be off wrt which season the bump(s) happened, do some fact checking before quoting me).  OK, OK, is this really b/c of NFLX?  Well, here's a direct quote from the show's creator, Vince Gilligan:

"I am grateful as hell for binge-watching. I am grateful that AMC and Sony took a gamble on us in the first place to put us on the air. But I'm just as grateful for an entirely different company that I have no stake in whatsoever: Netflix. I don't think you'd be sitting here interviewing me if it weren't for Netflix. In its third season, Breaking Bad got this amazing nitrous-oxide boost of energy and general public awareness because of Netflix."

Why does this matter?  How about this...  Instead of NFLX paying for content, the content providers may pay NFLX to air their shows.  That's f*ing incredible.

Add to the fact that NFLX now has critically acclaimed original content -- that's content available ONLY on NFLX ("House of Cards" and "Orange is the New Black" are two of them) and what we're slowly finding here is that NFLX may become the most powerful content distributor for TV (the profitable part of the entertainment business) on the planet.

Don't laugh or roll eyes, it's happening right now.  FOX is tying the same game as AMC did with "Breaking Bad" with their sitcom "The New Girl."  And you know what?... it's working again...

Now NFLX does have competitors, namely AMZN (I know they're not the first name to come up from entertainment industry folks, but the entertainment industry is wrong -- AMZN is the risk for NFLX). Another risk is the content creators using their own channels (no pun intended)... but that doesn't seem to work so far (and yeah I know what Hulu is and who created it).

Back to options, another fascinating thing about NFLX is the level of the implied.  Let's turn to the two-year IV30™ chart in isolation, below.

Look how low that volatility is relative to the last two-years.  Now a part of that is b/c NFLX was actually in the realm of solvency risk at one point, so the vol should have been higher, but given the complete turn around in the firm and the continued rip roaring results and impact on the industry, that low seems kinda low, right?  Or no?

Here's more news, from CNBC a day after I posted this article:
Groundbreaking news that Virgin Media is bringing Netflix directly to its set-top box in the U.K. in effect elevates Netflix to the status of a new cable network-a benefit for a cable company and beyond being an upstart threat to cable.

The deal, which makes Netflix available on cable set-top boxes for the first time, was announced Monday. On Tuesday, Netflix shares hit a new all-time high, trading 6.5 percent higher to $313, flying past its record $304 on July 13, 2011. (Click here for Netflix's (NFLX) latest stock price.)

The stock's nearly 220 percent gains this year have been driven largely by the success of its original content deals, which have helped add new subscribers, giving Wall Street confidence that exclusive originals will continue to deliver.

(More from Julia Boorstin: Is Apple's iRadio a Pandora killer? )

Virgin's parent, Liberty Global (LBTYA), gained just under a percentage point on Tuesday's news.

Virgin Media's partnership with Netflix is the first time a cable operator is bringing the streaming service directly to the set-top box. Other cable operators-like Comcast (CMCSA)-allow users to access Netflix through Internet-connected set-top boxes-but this is the first time a cable channel has directly made a deal with Netflix to treat its content just like that provided by cable channels like HBO (owned by Time Warner (TWX)) and Showtime (owned by CBS (CBS)). (Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC and CNBC.com.)

Virgin will integrate Netflix with its television content so it's easy to seamlessly browse and search across both TV and streaming content.

Source: CNBC via Yahoo! Finance Why Netflix is at a new all-time high, written by Julia Boorstin.


In any case, NFLX is in a position now where a very aggressive but in the realm of possible take on the firm is seeing a market cap well north of $50 billion.  Today it sits at ~$18 billion.  A word of caution though, this firm has been "this hot" before and almost went away in a matter of a year (or two), so, things are risky here. Wait a second, did I say risky?... But the volatility?... Eh, never mind...

This is trade analysis, not a recommendation.

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